Naming a Life Insurance Beneficiary
Key Points – Naming a Life Insurance Beneficiary
- It Doesn’t Take Long to Name a Life Insurance Beneficiary
- Two Types of Beneficiaries
- How to Name a Life Insurance Beneficiary
- Having Family Meetings to Make Sure You and Your Beneficiaries Are on the Same Page
- 5-Minute Read
Making the Most of Life Insurance
According to the National Association of Insurance Commissioners, tens of millions of dollars in death benefits go unclaimed annually due to beneficiaries not understanding the life insurance policies of their loved ones.1 That statistic is a tough one for all of us to stomach at Modern Wealth Management. It’s money going to waste simply due to people not being educated about how life insurance works. We’re hopeful that this article on naming a life insurance beneficiary can help educate policy holders and beneficiaries alike.
What to Consider When Naming a Life Insurance Beneficiary
Is there someone you care about who depends on you? If you die unexpectedly, how will that person that has relied on you adjust to life without you? That’s just a broad example of when it would make sense to name a life insurance beneficiary to help make sure that person will be taken care of if you pass on.
Primary and Contingency Beneficiaries
There are two types of life insurance beneficiaries that you can designate on your policy. One is a primary beneficiary, which is the first person or organization that you want to receive your death benefits. The other is a contingency beneficiary. They’ll receive your death benefits if your primary beneficiary for some reason can’t receive it or declines to do so.
Life Insurance Is Usually a Non-Probate Asset
One major advantage of utilizing life insurance as an estate planning strategy is that it can’t go through probate in most cases. There are some exceptions that you need to be aware of. If the life insurance policy holder didn’t name a beneficiary or if the beneficiary they named is deceased, the policy will go through probate. Another way that life insurance can go through probate is if the policy holder named their estate as a beneficiary.
If you want your life insurance beneficiary to receive your death benefit as quickly as possible, probate is something you’ll want them to avoid. Another reason that your beneficiaries will want to avoid probate is because it can be expensive. But again, that long and costly process can be avoided with life insurance.
Leaving Your Life Insurance to Charity
Many people think that the death benefits of a life insurance policy will automatically transfer to your heirs, but that’s not the case. You need to name a life insurance beneficiary to ensure that the person you want to receive your death benefits can do so. If there’s a charity or non-profit organization that is near and dear to your heart, those are also options when you’re naming life insurance beneficiaries.
Do You Live in a Community Property State?
In many cases, people will name their spouse as their primary beneficiary. And in these community property states,2 you’re required to list your spouse as a primary beneficiary—meaning they’re entitled to at least 50% of your death benefits.
- Arizona
- California
- Idaho
- Louisiana
- Nevada
- New Mexico
- Texas
- Washington
- Wisconsin
If you want someone other than your spouse to be your primary beneficiary, they will need to waive their right to your death benefits.3
Minors as Life Insurance Beneficiaries
If you list a child that’s under 18 as a beneficiary, keep in mind that there may be restrictions on their ability to receive your death benefits until they turn 18. There is another option other than life insurance if you have a minor child that you want to be taken care of if something happens to you. That is to create a living trust and designate your trust as the beneficiary. Either way, it’s advisable to consult an estate planning professional to review the best estate planning strategy for your situation.
Naming a Life Insurance Beneficiary Isn’t a Long Process
While probate can be a lengthy process, it doesn’t take long to name a life insurance beneficiary. When naming a life insurance beneficiary, you must provide the following info about your beneficiary to your insurance provider:
- Beneficiary’s full legal name
- Beneficiary’s relationship to you
- Their date of birth
- Their Social Security number
- And their address
You can share that information with your provider over the phone to name a life insurance beneficiary. A life insurance beneficiary designation form should also be available via your provider’s website to fill out electronically or to mail to your provider. Just make sure to confirm that your provider has current information for your life insurance beneficiaries and that you have copies of beneficiary forms to include with your overall estate plan.
Make sure to review and update (if necessary) your life insurance beneficiaries follow major life events. Examples include marriage, divorce, birth of a child, or death of a loved one. We’re guessing that you wouldn’t want your loved ones to be upset with you after you’re gone just because your life insurance beneficiaries weren’t up to date.
Family Meetings
Let’s circle back to the National Association of Insurance Commissioners’ alarming statistic. We don’t want you or your beneficiaries to contribute to that just because of miscommunication. That’s why we encourage people to have family meetings. It’s critical for you and your beneficiaries to be aware of who is receiving what if you, your spouse, or someone else in your family suddenly passes away.
Talking about impending death obviously isn’t an uplifting topic of conversation, but that doesn’t mean it’s not important. It’s extremely important if you truly care about leaving a legacy. Life insurance can be a big part of that, but you need to understand the nuances of naming a life insurance beneficiary.
Working with a Team of Professionals
It’s important to us that you have the confidence to make informed decisions with your money. There are so many rules surrounding wealth transfer, whether you’re trying to transfer life insurance, IRAs, 401(k)s, Roth accounts, etc. Rather than running the risk of not being aware of those rules or not understanding them, educate yourself about them by working with a team of professionals. At Modern Wealth, our team of professionals includes CFP® Professionals, CPAs, CFAs, estate planning professionals, and risk management professionals.
The Power of Life Insurance
Several of our advisors are also fortunate to study with Ed Slott, CPA, who was named “the best source of IRA advice” by The Wall Street Journal.4 Ed recently shared on America’s Wealth Management Show that there’s power in life insurance. He stated a straightforward question, “As a beneficiary, would you rather inherit $10 million in life insurance or $10 million in IRAs?” He said life insurance wins hands down because it’s tax-free income.
Ed had a whole chapter about the power of life insurance in his new book that he published, The Retirement Savings Time Bomb Ticks Louder, which he also reviewed on America’s Wealth Management Show with Dean Barber and Bud Kasper, CFP®, AIF®. Dean, Bud, and the rest of our team are always eager to pass along financial planning education to clients and prospective clients. If you have any questions about life insurance and how it can be utilized as an estate planning strategy, start a conversation with our team below.
We don’t want your money or your family’s money to be included in the tens of millions of dollars in death benefits go unclaimed each year. Let’s make sure that you and your loved ones are on the same page when it comes to life insurance and wealth transfer as they relate to your personal situation.
Resources Mentioned in This Article
5 Estate Planning Documents That Everyone Needs
Family Financial Planning with Matt Kasper, CFP®, AIF®
Charitable Giving in Retirement
Estate Planning Mistakes to Avoid with Tim Denker
What Is Probate and Why Should I Avoid It?
What Is a Living Trust and Do I Need One?
How to Be the CEO of Your Retirement with Tony Lewis
Why You Need a Financial Planning Team with Jason Gordo
5 NEW Important Things to Plan for from Ed Slott, CPA
The Retirement Savings Time Bomb Ticks Louder with Ed Slott, CPA
Other Sources
[1] https://content.naic.org/article/consumer-insight-what-know-about-life-insurance-beneficiaries
[2] https://www.forbes.com/advisor/life-insurance/choose-beneficiary/
[3] https://www.freewill.com/learn/how-to-name-a-beneficiary-for-a-life-insurance-policy
[4] https://www.theamericancollege.edu/about-the-college/our-people/faculty/ed-slott
Investment advisory services offered through Modern Wealth Management, LLC, an SEC Registered Investment Adviser.
The views expressed represent the opinion of Modern Wealth Management, LLC, an SEC Registered Investment Adviser. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.