Who Qualifies As A Life Insurance Beneficiary? A Deep Dive
The concept of life insurance, revolutionary as it may be, is anything but novel.
It dates back to 1583, when the first policy was issued in London, England. However, it was not until 1706 that a proper life insurance company was established.
All attempts before the Amicable Society for a Perpetual Assurance Office failed due to inaccurate risk assessment. Today, this insurance policy is seen as a vital medium for planning the future of one’s family. Given the uncertain economic conditions and volatile market, financial security is becoming a matter of concern and utmost importance.
No amount of money can indeed compensate for the loss of a life (especially that of a loved one). Even so, sole breadwinners must set up a safety net for their dependents should the unfortunate event happen. Life insurance will cover the policyholder’s family’s essential and emergency expenses.
It will enable all to live a stress-free life with the assurance that no needs will go unmet. However, one dilemma many new policyholders face is regarding the beneficiaries.
In this article, we will discuss how a life insurance policy will benefit and under what circumstances.
What Is A Life Insurance Beneficiary?
To define the beneficiary of life insurance, let’s learn more about the policy itself. This insurance policy acts as a contract between the insurer and policyholder to pay death benefits upon the latter’s demise.
This means a life insurance policy’s beneficiary is someone who qualifies to receive the aforementioned benefits after the policyholder’s death. It is important to remember that the policyholder can choose their beneficiaries based on who has a financial interest in their life.
Types Of Beneficiaries
According to 1891 Financial Life, life insurance beneficiaries can be divided into two categories – primary and contingent. A primary beneficiary is a person or entity that qualifies first to receive the policy’s death benefits. This could be a spouse, children, or other members of the family.
If the primary beneficiary dies before the policyholder or around the same time, the contingent beneficiary acts as the backup. Also known as secondary beneficiaries, they will become eligible to receive the policy’s death benefits.
Can Anyone Become A Beneficiary?
It is essential to remember that a life insurance beneficiary does not always have to be an individual. Even the policyholder’s estate, a trust, or a charity can be the receiving party. It may be possible that different states or policy providers may have restrictions when it comes to naming a beneficiary.
For instance – Forbes Advisor lists states like Arizona, California, and Washington that require the spouse to be the primary beneficiary, receiving at least 50% of the death benefits. Other states may permit someone else to be the primary beneficiary on the written consent of the spouse.
In general, anyone who is likely to suffer loss after the policyholder’s demise can be the first choice. Multiple beneficiaries can receive the benefits as long as the total share comes to 100%. Some people simply keep their spouse as the beneficiary and trust their discretion to distribute the money among other loved ones.
Children can also be a primary or contingent beneficiary (even minors). However, if the child is still a minor at the time of the policyholder’s death, the benefits will be transferred to the child’s legal guardian. Some people create a trust in their children’s name and put that as the beneficiary.
In any case, minors cannot access life insurance death benefits until they are of legal age. If someone has special needs, they are a good candidate for benefiting from the life insurance policy. However, the same can mean a considerable loss in terms of government assistance. It is best to establish a special needs trust and name that as the beneficiary.
Some people leave behind their legacy by naming non-profits or charitable organizations as the beneficiaries. They can be written down as the primary or contingent beneficiary for all or part of the policy money.
Can Beneficiaries Be Changed?
In most cases, it is possible to change a life insurance beneficiary, be it primary or contingent, at any given time. The process is fairly easy and can be done with the policy provider’s assistance. After certain events, updating or changing the receiving parties becomes imperative.
A few examples would be divorce, remarriage, or the death of someone listed as one of the beneficiaries. In the case of the former, the policyholder can keep the beneficiary name but must update the relationship by mentioning ‘ex-spouse.’
Under special circumstances like an ‘irrevocable designation,’ the policyholder loses their power to change the beneficiary name. The same will happen if the ownership of the policy has been transferred to someone else. The permission of the beneficiary or the new policy owner must be taken before changes are made.
Studies have found that even now, only 52% of Americans have a life insurance policy. Among these, Baby Boomers are the most adequately covered, whereas Gen-Z has the least coverage. A major hurdle in getting a policy is the paperwork and difficulty in understanding its terms.
Are you still sitting on the fence? Choose a reliable insurance provider who will lay down the policy details in simple terms. It may seem confusing at first, but things will become smoother with time. In light of the economic vulnerabilities, you cannot afford to not have a life insurance policy.
Read Also:
tags
Nabamita Sinha
Nabamita Sinha loves to write about lifestyle and pop-culture. In her free time, she loves to watch movies and TV series and experiment with food. Her favorite niche topics are fashion, lifestyle, travel, and gossip content. Her style of writing is creative and quirky.
