Life insurance beneficiaries play a crucial role in the distribution of your death benefits, so understanding what they are is essential. To help ensure you understand the impact your choices can make, we will take a look at what life insurance beneficiaries are, why they are crucial, and how to choose the appropriate beneficiary for your policy.
1) What Is a Life Insurance Beneficiary?
A life insurance beneficiary is an individual or entity designated to receive the death benefit from a life insurance policy upon the insured person's passing. This beneficiary can be anyone you, as the policyholder, chooses, such as a spouse, child, relative, friend, or charitable organization. By naming a beneficiary, you ensure that your life insurance policy funds are directed to the intended recipient(s) after you're gone.
The process of designating a beneficiary is typically straightforward. When purchasing a life insurance policy, you must provide the beneficiary's name, relationship, and other necessary details at the time you apply. Over time, It's crucial to keep this information current to reflect changes in your circumstances or relationships.
2) Why Are Life Insurance Beneficiaries Important?
Life insurance beneficiaries hold significant importance in the distribution of death benefits. By designating a beneficiary, you have control over who receives the financial protection your life insurance policy provides. Here are a few key reasons why life insurance beneficiaries are essential.
Control and Intent
Designating a beneficiary allows you to ensure that your loved ones or chosen recipients will receive the death benefit according to your wishes. Knowing that your intended beneficiaries will be financially protected when you are no longer there to support them provides peace of mind for everyone involved.
Avoiding Probate
Life insurance proceeds generally bypass the probate process, which means they can be paid directly to the designated beneficiary without the delay and potential complications associated with probate. This allows your loved ones to access the funds more quickly and efficiently, providing them with the financial resources they may need during a difficult time.
Flexibility
Life insurance policies often allow you to name multiple beneficiaries and specify the percentage of the death benefit they will receive. This flexibility enables you to divide the proceeds according to your wishes and the needs of your beneficiaries. Reviewing and updating these beneficiary designations periodically to reflect any changes in your family structure or relationships is essential.
3) Choosing Your Life Insurance Beneficiary
When choosing a life insurance beneficiary, there are important considerations and potential pitfalls to avoid. Let's explore who can be a beneficiary, common mistakes to avoid, and the crucial factors to remember when making this critical decision.
Who Can Be a Life Insurance Beneficiary?
In general, you have considerable flexibility in choosing your life insurance beneficiary. You can designate a spouse, child, relative, friend, or charitable organization. However, reviewing your specific life insurance policy's terms and conditions is crucial, as some guidelines may restrict who can be named as a beneficiary.
It's also important to consider contingent beneficiaries. These are individuals or entities named as backups in case the primary beneficiary predeceases you or cannot receive the death benefit. Naming contingent beneficiaries ensures that the funds are directed to an alternate recipient if the primary beneficiary is unavailable.
4) Common Mistakes to Avoid When Selecting a Beneficiary
While choosing a life insurance beneficiary may seem straightforward, there are common mistakes that you should avoid.
Not Updating Beneficiaries
Failing to update your beneficiary designations after significant life events — such as marriage, divorce, the birth of a child, or the passing of a loved one — can result in unintended consequences. Regularly review your policy and ensure that your beneficiary designations align with your current wishes.
Ensure your beneficiary is the age of majority in their domicile state. Insurance companies will not pay death benefits to a child under the age of majority. Ensure you have a custodian for the minor child and speak to a financial advisor to determine the best choice for your family.
Overlooking Tax Implications
Depending on your jurisdiction and the size of the death benefit, there may be potential tax implications for your beneficiaries. Consult with a tax professional or financial advisor to understand the tax implications and make informed decisions.
5) Special Considerations for Military Personnel
For military members and their families, there are specific factors to consider when selecting a life insurance beneficiary.
Military Life Insurance Death Benefits
Military personnel and their families can access unique death benefits through programs such as Servicemembers' Group Life Insurance (SGLI). These programs offer affordable life insurance coverage and can provide financial support to loved ones if the insured servicemember passes.
Many servicemembers find SGLI coverage isn’t enough to protect their families long-term. An increasingly popular solution is to take out a second policy to supplement SGLI. Should you choose to do this, it’s best to select a life insurance provider specializing in serving military members — like AAFMAA. Learn more about our term and whole-life solutions by visiting us online.
Choosing a Beneficiary as a Military Member or Family
As a military member or family, you should always consider potential deployment or combat situations that may impact beneficiary designations. Review your policy and consult with a financial advisor or military representative to understand the implications and make informed decisions.
6) Reviewing and Updating Your Beneficiary Designations
Regularly reviewing and updating your beneficiary designations is crucial to ensure they align with your current wishes and circumstances.
How to Update Your Beneficiary Designations
Contact your life insurance provider to update your beneficiary designations and inquire about the necessary forms and paperwork. Fill out the required information accurately, specifying the new beneficiary and their relationship to you. Submit the updated documents as instructed by your insurance company.
Other Estate Planning Considerations
When updating your beneficiary designations, it's essential to consider other aspects of your estate planning, such as wills and trusts. Ensure that your beneficiary designations align with your overall estate planning strategy, and seek guidance from legal professionals if needed.
By designating a beneficiary, you have control over who receives the financial protection your life insurance policy provides. Consider the rules and restrictions around beneficiaries, common mistakes to avoid, and important considerations when selecting a beneficiary. For military personnel and families, specific factors should be considered. Finally, periodically review and update your beneficiary designations to reflect your wishes and life circumstances.
Military Life Insurance Beneficiary Rules Made Easy
No one likes to think about the worst-case scenario. That’s why AAFMAA’s Life Insurance team is here to support to the military community. We offer term and whole-life policies designed specifically for military families and the phase of life they’re in.
Contact AAFMAA to learn more about our policies and receive a free quote. Learn more about the benefits of an AAFMAA Membership today!
This article was originally published March 3, 2021.