Choosing a Life Insurance Beneficiary
Life insurance policies require that you name a beneficiary. Many people do not give the process much thought, simply naming a spouse and/or children and then putting the whole thing out of mind.
But choosing your beneficiary and keeping that choice up to date is important. Here are some of the things to consider:
One of the advantages of life insurance is that proceeds payable to a named beneficiary pass outside of probate. Naming your "estate" as beneficiary subjects the money to the probate process, which can be both lengthy and costly. Life insurance proceeds are paid immediately to named beneficiaries.
The wording of beneficiary designations is very important. An improperly named beneficiary can have drastic effects on how the insurance proceeds are distributed.
You would not want to name your spouse simply by designating "husband" or "wife;" because this could result in an ex-spouse receiving proceeds intended for others. Accordingly, it is important to review insurance beneficiary designations in the event of divorce.
Naming specific children may mean that later-born children will be left out unless the beneficiary designation is changed.
Saying "Children of the insured, John Smith" could mean that your wife's child from a previous marriage, whom you meant to include, is in fact excluded.
Saying "Children born of the marriage of John and Susan Smith" may mean excluding adopted children.
It is also advisable to name a "contingent" or secondary beneficiary in the event a primary beneficiary has predeceased you.
Many people choose the wording for their beneficiary designations in conjunction with both their agent/broker and the attorney who has drafted their wills and/or trusts.
It is not generally advisable to name minor children as beneficiaries, but rather to name a guardian for minor children and a trustee for insurance proceeds and other assets to be managed until they reach the age of majority. Likewise, if a child named as a beneficiary on your policy predeceases you and you would want the proceeds to go to their child(ren), you must specifically state such. You must also decide how such grandchildren will share in the proceeds with your other children, whether everything will be divided equally or whether the grandchildren will split what would have been their parent's share.
It is very important to anticipate as many situations as possible. It is also vitally important to review your beneficiary designations on a regular basis. Changing beneficiary designations is easy, but you have to remember to do it. Unless you make an irrevocable designation (one that cannot be changed), as might be the case in a divorce settlement, you can change beneficiary designations as often as you like. You do not want to change beneficiaries frivolously, but you should change them when it is appropriate to do so.