The insurance industry offers many different varieties of life insurance geared toward the needs of the insured. Products include whole life, endowments and term life policies. Whole life policies build cash value, endowments are paid out to the insured if he reaches a predetermined age and term life policies pay out only if the insured dies prior to the end of the term. All of these policies share the ability to name a beneficiary.
A beneficiary is the person that will receive the proceeds of your life insurance policy should you die while the policy is in force. All insurance policies allow you to name a beneficiary, but there are certain restrictions that are governed by state law. Insurance companies employ underwriters who review your application and, in the case of your beneficiary, determine if the person you designated as a beneficiary on your application meets the requirements dictated by the laws in your state. You are notified if requirements are not met so you can choose another beneficiary.
When you decide to name a beneficiary, you typically must name a beneficiary that has an insurable interest in your death. An insurable interest simply indicates that if the insured dies, it will have a financial impact on the beneficiary. Since you have an unlimited insurable interest in your life and health, in most states this is sufficient to prove an insurable interest if you are a spouse, sibling, grandparent, parent or dependent of the insured.
Choosing a Beneficiary
If you own the policy and are insuring yourself, you can typically choose whomever you like to be the beneficiary of your policy unless the insurance company or the state have specific regulations that preclude your choice. Age is irrelevant when naming a beneficiary, though it should be taken into consideration, particularly if you are naming a minor child, as payouts typically cannot be made directly to minor children. You should always name a secondary beneficiary in the event that your primary beneficiary does not survive you. You can also name multiple primary beneficiaries of any age if you designate the proportions in which the benefit is paid. For example, you can direct the proceeds be paid to your named children, in equal shares. You can also assign percentages of the benefit proceeds to your beneficiaries. If your beneficiaries do not survive you, your death benefit is paid to your estate and allocated in accordance with your will.
Minors and Elderly Beneficiaries
If you name a minor child as your beneficiary, the insurer will require you also name an adult to act as trustee or custodian for the death benefit. You can also set up a trust for the proceeds in the name of the child and name the trust as the beneficiary. If you name a person who is older than yourself, such as a parent, you should name a secondary beneficiary to receive the proceeds if the primary beneficiary dies before you do. This is not required, but does ensure you do not have to update the policy should this situation occur. Be aware that your insurance policy beneficiary designation takes precedence over your will, so if you name your spouse, for example, and then divorce, unless you update your policy the ex-spouse will reap the benefits of your policy when you die.
- Texas Department of Insurance: Understanding Life Insurance; March 2011
- Insurance Machine: Can I Name a Non-Relative as the Beneficiary of my Life Insurance Policy?; 2009
- World Bank: The Role of the Underwriter in Insurance; Lionel Macedo; September 2009
- Illinois Department of Insurance: Frequently Asked Questions---Individual Life Insurance; January 2010
- Texas County and District Retirement System: Naming a Beneficiary; 2011
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