Having a life insurance policy is the most effective way to safeguard your loved ones financially, in case you were to pass away unexpectedly. It is one of the stepping stones of a sound financial plan.
A death benefit isn’t paid out automatically and that is why the role of beneficiary designation is of such importance when it comes to life insurance policies. Not only does a beneficiary need to know what life insurance their loved ones own but also be aware of the claim process and the distribution of benefits in the event of their death.
If you have an insurance policy or are looking to apply for one, but are unsure as to whom to name or choose as your primary beneficiary/beneficiaries, you have come to the right place to get all the answers you need!
What Is A Beneficiary?
A beneficiary, in the context of life insurance, is the legal receiver of the death benefit a policy will pay if the policyholder dies.
The division of financial products such as life insurance isn’t governed by your will and thus, naming beneficiaries is essential to ensure death benefits are spread out according to your wishes.
It is essential to put careful thought behind who you should name as your beneficiary, and review that decision periodically as you age. Remember, beneficiary designations can’t be corrected or changed after you are gone.
What Are The Different Types Of Beneficiaries?
There are two main types of beneficiaries; primary beneficiaries and contingent beneficiaries.
Primary beneficiaries are the first in line to receive death benefits from your life insurance policy. They usually include family members such as your spouse, children, mother, father, and siblings.
Apart from choosing primary beneficiaries, most policies also allow for the inclusion of one contingent beneficiary. In the unfortunate event that the policyholder and all primary beneficiaries die at around the same time, death benefits are then paid out to the contingent beneficiary.
Beneficiaries can also be designated as either revocable or irrevocable. Revocable beneficiaries can be added or removed from a policy at any time at the discretion of the policyholder. Whereas, irrevocable beneficiaries can not easily be changed or removed from a policy and have full rights to any death benefits.
How To Choose Beneficiaries For Your Life Insurance Policy?
Although it isn’t mandatory to name a beneficiary for your life insurance policy, it is something that you should always do. Not having a designated beneficiary on your life insurance policy at the time of your death can result in your death benefits being held in probate by the court.
The probate process can take years to reach a verdict as to who should receive the benefits and how assets are to be divided. All of this can easily be avoided by naming a beneficiary.
Even if you are unsure as to whom you would like to name as your beneficiary it is best to name at least one person on your policy just in case. You can always change or add other beneficiaries later on if you so please, as long as they are designated as revocable.
Here are some top tips when it comes to choosing beneficiaries for your life insurance policy:
- Shouldn’t be too young or too old. The ideal age should be between 20 to 60.
- Possess the ability to handle and manage money
- Is a close and trusted family member; your spouse, parents, or older children
- Lives with you or is easily reachable
Can You Name Your Trust As A Beneficiary?
Yes, a beneficiary can be a person, a charity, a trust, or even your estate. However, if you do decide to name your trust as your primary beneficiary here are a few benefits and drawbacks that you should be aware of.
First, let’s take a look at the benefits of naming a trust as a beneficiary on your life insurance policy:
- Helps avoid probate
- Protects from creditors
- Is a good option if you have young children who can’t be trusted with large sums of money
- Can be useful for policyholders that have blended families
The greatest disadvantage of naming your trust as a beneficiary is that whatever assets the trust receives are subject to required minimum distribution payouts. Also, if the beneficiary is a person, death benefits are distributed tax-free. However, in the case of a trust being a beneficiary, taxes, in most cases, do apply.
Common Mistake To Avoid With Beneficiary Designations
Here are a few common mistakes that you should avoid when it comes to beneficiary designations as they can have long-term and irreversible consequences.
- Not having a primary beneficiary listed on your life insurance policy
- Not having a contingent beneficiary listed
- Naming a minor or disabled person as your primary beneficiary
- Failing to update or review your policy as you age
- Failing to understand the differences between revocable and irrevocable beneficiaries as well as the distinction between per capita vs. per stripes
- Naming a trust or estate as a beneficiary without considering legal and financial implications.
The Role Of Beneficiary Designations In Life Insurance Policies
It is not enough to just name a beneficiary on your life insurance policy. It is just as important to share that information with the beneficiary you have chosen and keep them informed about your overall succession or estate plan so that they are well aware of what they are supposed to do in case of your untimely demise.
Remember, only your appointed beneficiary can file for a life insurance claim. As such, they should know everything about the policy, who is your provider, what are the policy terms and conditions, and how death benefits are to be divided and distributed as per your wishes.
By keeping beneficiaries informed and in the loop about your succession plans can allow for a smooth and hassle-free transfer of ownership of assets avoiding any legal battles or family conflicts.
Life Insurance For Nova Scotians – McIver Insurance
To learn more about the importance of beneficiary designations and how they can impact your life insurance policy, book a call with one of our experts today and become a part of Nova Scotia’s most trusted insurance brokerage firm.