Choosing a Beneficiary For Your Life Policy and Informing Them of The Benefits
February 13, 2017
A beneficiary is a person or entity that is chosen by a policyholder to receive financial compensation when the policyholder dies. Choosing a beneficiary can be a tricky task.
There are two types of beneficiaries, a primary and a secondary beneficiary.
A primary beneficiary is a person or entity that receives the money when the policyholder dies. A secondary/contingent beneficiary is a person/entity that only receives the policy payout if the primary beneficiary dies before the policyholder.
Before a policyholder chooses his/her beneficiary, she/he must consider several factors including:
Financial dependents – Choosing a beneficiary
A policyholder takes a life insurance policy in order to secure the future of his/her dependents when he/she is dead. A policyholder must know the people that heavily rely on him/her for economic survival and give them first preference.
In most cases, policyholders name their spouses or children as their primary beneficiaries.
Beneficiary options – Choosing a beneficiary
A beneficiary does not only need to be a person. A beneficiary can be a trust, a charity, and/policyholder’s estate.
A trust is a legal agreement whereby a person (trustee/trust manager) looks after a property on behalf of its beneficiary. A policyholder can make a trust a beneficiary if his/her children are very small.
People with no dependents or whose families are financially secure can name a charity of their choice to be a beneficiary. This is a good way of creating a legacy.
With regards to life insurance, an estate is a person’s net worth at the time of his/her death. Although a policyholder can name his/her estate as a beneficiary, it is not recommended.When the policyholder dies and the death benefit is paid out, the policyholder’s liabilities and debt are paid off by the death cover.
A Legal Guardian – Choosing a beneficiary
A legal guardian can also be named a beneficiary if the policyholder’s children are still minors.
A policyholder also needs to review his/her policy often. He/she needs to keep up-to-date with the lives of his beneficiaries.
A lot of things change in life. A policyholder may lose his/her beneficiaries through death or the beneficiaries may no longer depend on the policyholder anymore.
In that case, the policyholder needs to review the policy and change the beneficiaries according to the changing circumstances.
The several factors that can result in the change of beneficiaries include divorce, marriage, and the addition of children in a policyholder’s family.
Once the policyholder has considered all the necessary factors and named his/her beneficiaries, he/she should inform them so that they know what to do in case he/she dies.
The advantage of informing beneficiaries is that the death benefit will not go unclaimed.
If a policyholder decides to change the beneficiary on his/her life insurance policy, he should contact the life insurance company and make the necessary changes.
He/she should inform the new beneficiary of the policy and also contact the former beneficiary and update him/her about the latest changes.
This helps to avoid future conflicts between the new and old beneficiary when the policyholder dies.
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All info was correct at time of publishing