Life Insurance Beneficiaries Rules & Changes

Choosing a beneficiary is an essential part of properly structuring a life insurance policy. You must carefully consider the potential consequences of putting a significant sum of money into another person’s hands. Additionally, you must familiarize yourself with the rules and regulations regarding the various life insurance beneficiary designations, and how each one affects the other.

Primary Beneficiary

The primary beneficiary is your first choice to receive your life insurance policy proceeds. You may select as many are beneficiaries as you want, and you may divide the money in any manner you see fit. Spouses, children, parents and business partners are among the most common primary beneficiaries.

Contingent Beneficiary

The contingent beneficiary is your second choice to receive payout from your life insurance policy. Again, you may choose any number of contingent beneficiaries, and split the proceeds however you feel is most appropriate. It is important to note that contingent beneficiaries will only get paid if all primary beneficiaries are either unwilling or unable to receive the money.

Per Stirpes

Many life insurance carriers allow you to list beneficiaries without actually naming them directly. By indicating a “per stirpes” designation, you indicate your desire for that beneficiary’s portion of the policy proceeds to be equally distributed among his own heirs in the event that he dies before you. The per stirpes technique can be an effective method of ensuring that a predetermined benefit remains within the family.

Minor Children

It is not uncommon for parents to name their minor children as contingent beneficiaries on their life insurance policies. Unfortunately, without additional planning, you may be creating a potentially tenuous situation for your children. Life insurance carriers cannot give money to underage children. If the only surviving beneficiaries are minors, your policy proceeds are put into a simple trust for the benefit of the children. Courts will then decide on a trustee, which may or may not be the same person you would choose to oversee your children’s trust fund. It is highly recommended that you establish a trust beforehand and list the trust itself as a contingent beneficiary.

References

Healthcare Consultants: Designating Your Life Insurance Beneficiary
Death Care: The Beneficiary's Guide to Life Insurance
Manulife Financial: An Advisor's Guide to Beneficiary Designations

Resources (Further Reading)

Quick Quote: Life Insurance Beneficiaries

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This article is a Twisted Nonsense Exclusive! (04/06/2011)