Choosing a Beneficiary

Posted in Life Insurance

January 15th, 2009

Choosing a Beneficiary and Beneficiaries, Defined

Life insurance provides financial support to your survivors after you pass away. The people who you choose to benefit from your life insurance policy are called beneficiaries.

Choosing a beneficiary can be difficult, but it is probably your most important consideration when choosing to purchase life insurance. The people most likely to benefit from your policy would usually be your spouse, children or relatives, but you can name anyone to be your beneficiary – your best friend, a charity, or even your cat. However, it is not a decision to be approached lightly. Your choice of a beneficiary can impact your entire estate, have tax implications, and also influence the amount of proceeds actually received by the beneficiary.

Whatever you choose, the following guidelines may be helpful in designating a beneficiary for your policy.

First, you should consider who would gets the most benefit out of your life insurance policy. This could be your spouse, your children, or a favorite charity. Most policies will allow for multiple beneficiaries, which would allow you to apportion the proceeds to more than one individual. However, if you name more than one beneficiary it is generally considered wise to divide the proceeds by percentages, rather than designating exact dollar amounts. An estate planner can help you in this area.

Who will be handling the funeral expenses and bills? These costs can leave a financial burden on your family, and designating a portion of your life insurance to this purpose may be advisable. You should also make sure that the policy includes sufficient funds to cover all of your expenses in this area.

Do your future plans involve major expenses, such as college tuition for your children, or paying off a long-term mortgage? You might choose to have a portion of the policy set up to cover these expenses, in case you unexpectedly pass away. In this scenario, a term life insurance policy will not make as much sense.

Be sure to talk about your options with an estate planner or insurance agent to find out what limitations you might have on your policy. Its also a good idea to review your beneficiary designations from time to time, especially after major life events such as weddings, divorces, births or deaths. This will help to ensure that the policy you choose will be used as you wish.