Beneficiary Stipulations for Life Insurance Benefits

One of the most important considerations regarding your life insurance policy involves your beneficiaries, or the person or persons you select to receive the benefit in the event of your death. Multiple beneficiary designations exist, giving you the ability to effectively transfer your assets in the manner you see fit. Understanding the various beneficiary designations, as well as how each interacts with the other, is essential to properly arranging for the distribution of your wealth.

Primary Beneficiary

The primary beneficiary represents your first choice of people to receive life insurance money. The primary beneficiary, or beneficiaries, gets paid before anyone else. You may have any number of primary beneficiaries, and you may divide the benefit however you see fit.

Contingent Beneficiary

The contingent beneficiary represents your second choice of people to receive life insurance money. Contingent beneficiaries only receive proceeds if all listed primary beneficiaries are unable or unwilling to accept the money, or if they die before you. No restrictions exist on the number of designated contingent beneficiaries.

Per Stirpes

Many life insurance companies allow you to list beneficiaries, either primary or contingent, without actually naming them, but instead indicating a “per stirpes” status. This designation instructs the carrier to distribute proceeds from your policy to the heirs of the listed beneficiary if that person dies before you. The per stirpes technique allows you to ensure benefits are paid to the family of your beneficiary. If per stirpes status is given to a primary beneficiary, none of the contingent beneficiaries will receive any money.

Minor Children

Children tend to be the most common contingent beneficiaries. While naming your children as the secondary recipients of life insurance proceeds may sound like a good idea, many potential dangers and complications exist with such a designation. Life insurance companies cannot pay benefits to minor. If you are underage children are the only surviving beneficiaries listed on your policy, those proceeds are put in trust until the children reach age 18. The courts then choose a trustee, who may not be the same person you would trust with the financial welfare of your young children.

References

Healthcare Consultants: Designating Your Life Insurance Beneficiary
Mass Mutual: Understanding Life Insurance Beneficiary Designations
Manulife Financial: An Advisor's Guide to Beneficiary Designations

Resources (Further Reading)

Cash Money Life: When Do You Need Life Insurance?

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This article is a Twisted Nonsense Exclusive! (04/04/2011)