Broker Check

Coming to Terms with Life Insurance Beneficiary Arrangements

| November 13, 2017
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In today’s rapidly changing financial world, it is easy to become lost in a sea of unfamiliar industry terminology. Life insurance is no exception. One area related to life insurance that can be especially confusing is the language used to describe beneficiary arrangements. 

What is a Beneficiary? 

A beneficiary is an individual, group of individuals, or organization specified by the policyowner to receive the proceeds of a life insurance policy when the named insured dies. If you are the owner of a life insurance policy, you usually have a great deal of flexibility and may generally name almost anyone as a beneficiary. However, slight differences in the wording of your beneficiary designations may have considerably different implications. So, when naming beneficiaries, it is important to be aware of the tax and legal complications that need to be negotiated in attempting to fulfill your wishes. 

When you are asked to designate beneficiaries on your life insurance policy, you usually select both primary and contingent beneficiaries. A primary beneficiary is entitled to the life insurance proceeds of the policy upon your death. On the other hand, a contingent (or secondary) beneficiary is entitled to the policy proceeds if the primary beneficiary predeceases you. 

A beneficiary can either be a specific person (identified by name and relationship) or a class (such as the children of the insured). While the naming of specific beneficiaries is usually clear-cut, some complications may arise when designating classes of beneficiaries. For example, if you plan to name your children as beneficiaries, is it your intention to include adopted children or children by a former spouse? 

Moreover, if your children are minors, will the insurance company pay the proceeds to a minor beneficiary?  A better choice might be to establish a trust for your children’s benefit and then designate the trust as beneficiary. In this case, a trustee of your choice can be given discretion to make payments to minor beneficiaries according to their needs. 

Can Designations be Changed? 

Typically, life insurance beneficiary designations are revocable, in which case you may change the beneficiary arrangement as often as you wish. The death of a beneficiary, the birth of a child, or a change in marital status are all events that might prompt a policyowner to contemplate changing beneficiary designations. A person designated as a revocable beneficiary has only an expectation of benefits, because the policyholder can exercise any of the policy rights without the consent of the revocable beneficiary. 

On the other hand, if desired, beneficiary designations may be defined as irrevocable, preventing any changes without the consent of those beneficiaries. 

Regular Reviews 

As life insurance proceeds may represent one of your most valuable assets, your desired intentions should be clearly set forth in the beneficiary designation. Unexpected changes in family circumstances can leave you with unintended beneficiaries. To ensure that only your desired objectives are met, arrange for an annual review of your policies and beneficiary designations, especially if you are unsure about how they have been recorded.

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