To avoid this process and allow loved ones to receive the death benefit tax-free sooner after the policyholder’s death, it is wise for the policyholder to designate beneficiaries. Here are some steps policyholders can take to choose a beneficiary for a permanent life insurance policy and ensure they will get financial protection:
1. Decide who needs the financial benefits of life insurance.
The death benefit payout from a life insurance policy is often targeted to loved ones who need it most. For example, if the policyholder’s reason for originally purchasing the policy is to provide income replacement, it makes sense for them to name their beneficiary as a spouse or partner who would be adversely affected by the loss of that income. Since life insurance death benefits are often paid out much faster than an estate going through probate, assigning an appropriate beneficiary can provide quick cash for those who need additional financial protection.
2. Understand who can benefit.
A person, trust, business or charity can be named beneficiary of a permanent life insurance policy. For someone considering naming someone as a beneficiary, it is important to note that they must be over 18 years old. If a policyholder wishes to leave the benefit of a policy to younger heirs, it is best to leave a trust which can then distribute the funds accordingly. Be sure to consult an attorney when establishing a trust.
3. Familiarize yourself with primary and secondary beneficiaries.
A primary beneficiary (or multiple primary beneficiaries) will receive the proceeds of a life insurance policy after the death of the insured. There may also be one or more secondary or contingent beneficiaries who will receive the death benefit if the primary beneficiaries predecease the policyholder.
When assigning multiple beneficiaries, people often assign them as:
- Per capita, which means that the death benefit is distributed equally among all living beneficiaries.
- By agitation, which means that the death benefit would pass to the heirs of a deceased primary beneficiary. For example, if a policy has two siblings named as beneficiaries, but one predeceases the policyholder, their share of the death benefit would pass to the deceased beneficiary’s children and be divided accordingly.
4. Learn all state-specific laws.
Some states designate marital property, such as a permanent life insurance policy, as joint property. In these states, a spouse may be entitled to claim a portion of the death benefit if the premiums were paid with the couple’s “community” money. It may be a good idea to work with an attorney if someone lives in a community property state and wants to enroll someone other than their spouse as the beneficiary of a life insurance policy.
5. Keep beneficiaries informed.
Choosing the right life insurance beneficiaries can give policyholders and their families peace of mind. But keeping beneficiaries informed is key to ensuring the death benefit ends up in the right hands. Major life changes, such as marriage, divorce, or the birth of a child, are good times to review and update the list of beneficiaries.
The bottom line
Before choosing the beneficiaries of your permanent life insurance policy, it is important to determine who most needs the policy’s financial support, who can be a beneficiary, and how many primary and secondary beneficiaries will be assigned. Once the policyholder has a list of beneficiaries, they should check state-specific laws and consult with a financial professional if necessary. Then it’s about assigning beneficiaries and keeping that list updated as life circumstances change.
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Source: Fidelity Life