8 Tips for Choosing a Life Insurance Beneficiary
Undoubtedly, life insurance is one of the most important insurance products out there, especially if you worry about a loved one’s financial stability if you were to pass in an untimely fashion. Even when we’ve done all the planning in case something terrible happens, we’re not done until we’ve picked the right beneficiary or beneficiaries. Picking the right person isn’t always as easy as you’d think. For instance, you may want to leave most of the benefits to a child but if that child is still not an adult when you pass, things may get obligated. Or, what if you make one of your parents a beneficiary and that person passes away before you do? We answer that and other important questions about life insurance beneficiary rules below.
A Child as the Beneficiary of a Life Insurance Policy: Life Insurance Beneficiary Rules
You can leave a child of any age your entire life insurance coverage but that child will not be able to access those funds until he/she reaches the age of 18 at minimum. Some policies will not pay out funds until the beneficiary is 21 years old! If your main objective is to provide financial assistance to a child and need for them to access the money right away, your best bet is to leave the policy to a legal guardian that you trust .
What if There’s a Period of Time When Funds Are Needed Most?
For most people a loved one’s lost income will probably affect them the most early on, especially if the passing came too soon. What if the beneficiary is not of age but need the funds to begin college. If for any reason you need to control when the policy pays out it may make sense to buy a term life insurance policy which allows you to control when payments are made. However, for the benefit to be paid, you must pass on within the term limits of your policy, which may be tricky. Usually, term life coverage comes in a fixed span of time, like 10, 20 or 30 years. If you don’t like the idea of paying into the fund and possibly outliving it, you should consider a whole or universal life insurance policy because these cover the entire life of the insured.
How Is Life Insurance Paid Out to Beneficiaries?
There are no rules as to whom you must name as a beneficiary. When you think about leaving people behind, how many folks come to mind? The rule of thumb for most people is to choose the person most impacted by your absence. However, there may be a handful of people who will be directly affected by your passing so it’s good to know that you don’t have to pick one over all the others. You can choose a few people easily. You also don’t have to pick only your spouse. You can even name young children as beneficiaries. Also, you can elect different coverages for each beneficiary. Just remember that children under the age of 18 (sometimes 21, depending on your policy) will not be able to receive benefit payments unless you choose a legal guardian as the beneficiary or unless they wait to come of age.
It is not recommended that you name a creditor as a beneficiary, but you can name a beneficiary and ask that they pay the debt on your behalf.
How Does Living in a Common Property State Affect My Life Insurance Policy?
If you’re married and live in one of 9 common property states life insurance beneficiary rules dictate that your benefit goes to your spouse, unless she/he waives that right. You’ll need to do this if you decide to designate someone else as the beneficiary. The 9 common property states are: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.
What if Something Happens to My Life Insurance Beneficiary?
If you’re only interested in having one beneficiary, It’s highly suggested that you also have a life insurance contingent beneficiary in case something happens to your beneficiary. The primary beneficiary will be the person you leave the policy to and the contingent beneficiary would be the second in line to inherit the policy.
What Happens to Life Insurance with No Beneficiaries?
If you don’t have a life insurance beneficiary or if the one you chose passes away, your life insurance goes into estate probate, which is a way of proving the policy is genuine and legitimate. The process works this way: First, all your debts are settled and then the estate is divided amongst those the courts decides are the rightful recipient(s).
It’s always a good idea to prevent this from happening by choosing someone who will survive you.
What if I Decide to Change My Life Insurance Beneficiary?
Just because you’ve chosen a primary and contingent beneficiary doesn’t mean that your choices are set in stone. Things happen that show us that we can improve upon old decisions, and this is true for life insurance too. You can update selections in your life insurance policy at any time. One important thing to keep in mind, however, is that you will also need to update the information if it’s included in your will. Otherwise, conflicting information may cause confusion and anguish, which you will not be around to resolve.
Is Life Insurance Taxed?
Proceeds from a life insurance policy can be taxed if you do not transfer the ownership of your life insurance person to another person or to a life insurance trust. However, this is also not a great option. To learn more about this, speak with a trusted life insurance agent who will help you avoid making mistakes. If you’d like us to pair you up with a knowledgeable agent, visit here.
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It’s important to be honest when you answer these questions because a fraudulent application may result in your benefit not being awarded to your beneficiaries.
There are major differences between trusts and wills, including when the document takes effect, the probate process and various other significant details.
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