How to choose your life insurance beneficiaries
Image source: Getty Images
Life insurance policies protect beneficiaries. When a life insurance policy is purchased, it pays a death benefit if the person covered by the policy dies while the policy is in force. A death benefit will not be useful to a deceased person, but the policyholder chooses the beneficiaries who will receive this money from the insurance company after their death.
This is why it is so important to choose the right beneficiaries.
But, how can a person who purchases life insurance choose the right people to receive the death benefit? Here are some key things to consider when making this crucial decision.
Who will need the financial assistance?
Life insurance is purchased to provide a death benefit to people who are currently dependent on the deceased person to provide income or services. As a result, it makes sense to leave money for beneficiaries who would need the death benefit money to maintain their standard of living after the policyholder’s death.
Often spouses and children are appropriate beneficiaries. If the policyholder’s spouse were to be unable to pay the mortgage in the event of the policyholder’s death, the surviving spouse would be a good beneficiary because he would have significant financial need. The same is true if the children of the policyholder could not afford the school fees.
Others could also be beneficiaries. This could include aging parents dependent on the policyholder for care services they would have to pay if the policyholder died. Or it could include a business partner who needs money to redeem the interest of the deceased policyholder.
What are the rules for beneficiaries?
It is also important to know what rules, if any, might apply to people who might be named as beneficiaries.
For example, in some community ownership states, a surviving spouse may have a legal right to a portion of a death benefit from a life insurance policy – even if someone else has been named as the beneficiary. And if a child is named as a beneficiary, the child cannot inherit and manage the money directly if they are under 18, so parents may need to create a trust or appoint a guardian.
Does a beneficiary have to be a person?
Policyholders should not assume that they have to name someone to be the beneficiary. In some cases, a trust might be a better option than an individual.
Designating a trust as the beneficiary might be the best decision in situations where the money is intended to benefit a minor or disabled dependent who could not handle the money themselves.
If the policyholder wants to ensure that the death benefit is used for something very specific, such as paying for a child’s education, they can also create a trust that sets limits on the use of the money. money. A trust could also help ensure that the money does not fall into the wrong hands in the event of a divorce of a beneficiary or if the beneficiary is not very responsible for the money.
Would multiple beneficiaries make sense?
Finally, policyholders should consider whether it makes sense to designate more than one person as beneficiary. This could involve naming a spouse and several children each as beneficiaries, or naming a spouse as well as aging parents.
Ultimately, everyone who purchases life insurance needs to think about how best to protect and support their loved ones and select their beneficiaries accordingly.
The best credit card erases interest
If you have credit card debt, transferring it to this top balance transfer card can pay you 0% interest for 18 months! This is one of the reasons our experts rank this card among the best to help you get your debt under control. This will allow you to pay 0% interest on balance transfers and new purchases during the promotional period, and you will not pay any annual fees. Read our full review for free and apply in just two minutes. We strongly believe in the Golden Rule, which is why the editorial opinions are our own and have not been previously reviewed, endorsed or endorsed by the advertisers included. The Ascent does not cover all the offers on the market. The editorial content of The Ascent is separate from the editorial content of The Motley Fool and is created by a different team of analysts. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.