Beneficiary Definition - Understanding Life Insurance Policy Basics
What You Need to Know About Your Beneficiary and Plan for Life's Changing Needs
Understanding What Beneficiary Means for Life Insurance
No one likes to think about dying, but when it comes to life insurance, you need to figure out who will get the money when you die. It is important to understand what a beneficiary is and how your life insurance policy works when looking to pay out the benefits of your policy in order to come up with the best strategy for your policy beneficiary.
What is a Beneficiary? Definition
Definition: The beneficiary is the term in a life insurance or annuity insurance contract that identifies who will receive the benefit in the event of the insured death. A policy may have more than one beneficiary. The beneficiary can be revocable or irrevocable. The primary beneficiary is the person who first would receive the benefits of an insurance policy. If the primary beneficiary is deceased then the contingent beneficiary would receive the proceeds of the insurance policy. A contingent beneficiary is also sometimes called a secondary beneficiary. It is important to understand the role of the beneficiary in the insurance contract to ensure that regardless of circumstance the right person will receive the benefit.
Beneficiary can also refer to someone who receives benefits from a health insurance policy such as payments for a health care service.
How to Choose Your Beneficiary
Choosing a beneficiary on a life insurance policy can be as challenging as figuring out what kind of life insurance to buy.
Although some cases of naming a beneficiary are simple, you should consider naming a contingent beneficiary or a secondary beneficiary and reviewing your beneficiary choices throughout the course of your life as your situation changes, or if you change life insurance policies.
Who Will Get The Money From Your Life Insurance Policy?
The three most important things when you sign up for your life insurance policy are probably passing the life insurance medical exam, selecting your amount of coverage, and choosing the beneficiary.
After all, your beneficiary or beneficiaries will be the one(s) who will get the money from your policy after you die. You will have the opportunity to identify the beneficiary or beneficiaries as part of your life insurance paperwork. The beneficiary should be identified as clearly as possible, using the full name and, if possible, social security numbers and dates of birth. Provide as much information as you can about your beneficiary so they can be found and properly identified at the time of your death.
Can You Name More Than One Primary Beneficiary?
It is possible to name more than one primary beneficiary by assigning a percentage of the life insurance benefit among a few people on your life insurance application.
Examples of How the Beneficiary Works : How to Choose a Beneficiary
No one can figure out who your beneficiary should be except you. You need to take numerous things into consideration, like the reason you have life insurance and who would be left with costs or who would need the benefits most after your death. Here are some examples of using some strategies in choosing your beneficiary for different life circumstances.
Example of Splitting the Primary Beneficiary in Your Life Insurance
John is remarried with two kids from his former marriage.
He owns a home with his new wife, and although he loves her very much, he knows that she's not the best at managing money. He worries that if he were to die, that she might have a hard time managing the costs of the children and the home. He wants to make sure that she has enough to live well, but that the children will also receive their appropriate share of the life insurance benefits. After discussing the situation together, they agree to use a different strategy for his life insurance benefits. John decides to leave 30% of his life insurance to her as a primary beneficiary and 70% to the children. This gives his wife enough money to cover all the house costs and his children enough for their college funds.
Example of Splitting the Beneficiary : Planning for Life Changes
Mary is single, she decides to buy a universal life insurance policy while she is still young to maximize her savings and secure cheaper life insurance, rather than wait until she is married with children.
Even though she wondered if she needed life insurance, after doing some research, she calculated that buying early will allow her to save money in the long run, pay off her whole life insurance by the time she is 40 and manage her costs. She has a problem though, she does not have any dependents. She decides to name her mother for half the life insurance benefits and her best friend for the other half. She makes the beneficiary revocable so that when her situation changes in life, she can always change it. This is not the same scenario as naming a contingent beneficiary, splitting the beneficiary allows the benefit to be shared among two people.
Examples of a Contingent Beneficiary in Life Insurance
Elizabeth and Doug are getting married, they buy life insurance because they want to protect each other in case anything happens to one of them, they can know the other will always be protected. They name each other as beneficiaries but realize that whenever they travel they are together. Their life insurance adviser suggests that they choose contingent beneficiaries in case they die in an accident together. Elizabeth chooses her sister, and Doug chooses his brother. They strategically split the contingent beneficiary to give each 50%, this ensures them that they will each get a share enough to cover funeral expenses if something as tragic as both their deaths happens. They make the beneficiary revocable so that they can adjust this as time goes on and their lives change, but are comfortable in knowing that the funds will go where they want them to in the event of their subsequent deaths.
Example of Secondary Beneficiary - Surviving Spouse and Children
Jim and Tina have decided to buy a term life insurance policy to protect their family financially if they were not available to do so. If either Jim or Tina died, the surviving spouse would be the primary beneficiary. If both Jim and Tina became deceased their oldest child would receive the proceeds from the life insurance policy because their oldest child was chosen by Jim and Tina as the contingent or secondary beneficiary.