Deciding to buy a life insurance policy is a big decision. Namely, you will need to make sure the money goes where you want it to after your death. Therefore, you will have to name a policy beneficiary. Who is this party?
The beneficiary is a party you choose to receive the life insurance payout—the death benefit.
When you buy the policy, you will have to name the beneficiary, and possibly establish rules governing the use of the money. By insuring your life, you authorize the life insurance company to pay out a sum of money on your death. However, because you the policy only pays after your passing, you must decide where you want the money to go well beforehand.
Who Can Be Your Beneficiary?
In general, you can name a wide range of people to be your beneficiaries. These might include:
Many people leave their life insurance money to their spouse. Usually, this person is the next-of-kin to receive the deceased's estate anyway. Therefore, leaving the money to them makes sense. It can help them pay any outstanding debts, support the family, and recover income lost as a result of your death.
2. Your Estate
While you can name your estate itself as the beneficiary, the death benefit might become taxable under the estate administration tax.
Just as you can name a spouse a beneficiary, you can also name a child. However, if you name a child who is a minor, you may want a trustee to receive the payment in trust on behalf of the minor beneficiary (See Trust Accounts Below). The trustee can be named on the Life Insurance application.
4. Trust Accounts
A trust account can act as the beneficiary in cases where you want to establish rules on where your money goes. You will set up the trust to receive the death benefit, and you will also appoint a trustee. The trustee will then follow rules attached to the trust account to disperse the money. For example, if you want a child to receive money for their college tuition, a trust can establish the rules to make sure the school receives the money.
5. Other Relatives And Third Parties
In reality, you can name almost anyone as a life insurance beneficiary. You might name a close friend, a charity or even a business partner as the recipient. It all comes down to where you want the money to do the most good. You can also name trusts in these cases, too.
6. Multiple Beneficiaries
In many cases, you can name multiple beneficiaries on the policy. Often, if you name multiple beneficiaries, you can set a percentage of the money that you want to go to each party. For example, a spouse might receive 50% of the money, a child 30%, and a charity 20%.
It is important that you make sure your life insurance money goes to those whom you want to benefit the most. Choosing the correct beneficiary will help direct the money appropriately.