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How to Choose a Life Insurance Beneficiary: Top 7 Tips

Whether you’re reconsidering the terms of your policy after decades of coverage or just now requesting a quote, life insurance can feel overwhelming. Once you have figured out how much coverage you need and whether term life insurance or whole life insurance is more appropriate for your situation, you still have to choose your life insurance beneficiary. In some circumstances, the decision might be pretty straightforward. But in many others, choosing a life insurance beneficiary comes with more caveats than you might have considered. Here is a quick primer on how to choose your life insurance beneficiary:

Choose a Life Insurance Beneficiary (or Beneficiaries) Based on Your Situation

Essentially, your beneficiaries should be chosen based on the people who are financially dependent on you in any significant way. These dependents – not always the same “dependents” you would claim on your tax return, are likely different for everyone. If you’re married with no children, for example, your primary beneficiary would likely be your spouse. Even if he or she also has a stable career, a life insurance payout can cover the loss of income. It’s important to know if the payout is available to help pay off debts. But what about if you’re married with no kids but have a parent you expect to support in retirement? Or you have a relative who helped you pay your way through college and you want to repay them? What if you’re single and want to make a large final donation to a charity? Or if you want to ease the financial burdens of a good friend? There are few rules when it comes to designating a life insurance beneficiary – the money can go to a single person, multiple people, a trust or a charity. Which option is right for you depends entirely on your circumstances.

Be Specific in Your Designation

If you choose not to designate a beneficiary, the payout will go to your estate, which is the only option you should try to avoid. The process of going through probate to get the payout to an appropriate beneficiary can be long and costly. And when you do choose beneficiaries, be as specific with your wishes as possible. A SelectQuote representative can talk to you about the potential issues with naming “my children,” “my parents,” or “my business partners” as beneficiaries with no further specifications.

Always Choose a Contingent Beneficiary

No matter how unlikely it seems, there are many situations in which life insurance proceeds need to go to someone other than your primary beneficiary. If your primary beneficiary is also deceased at the time of your death, can’t be found or refuses your life insurance payout, you will need a contingency plan. Your contingent beneficiary could be a parent, a sibling, a close friend or a charity. It should be as carefully chosen as your primary beneficiary.

Revisit Your Beneficiary Designation Every Year

You should reconsider your beneficiary annually, in the same way you reconsider your coverage needs. The circumstances of your life (new job, new house, married, divorced, new child, lost a parent) are always changing. By keeping your coverage amounts and beneficiaries up-to-date, you’ll ensure the proceeds of your policy end up where they need to.

Consider Your Beneficiary’s Circumstances

Sometimes, naming beneficiaries with the best of intentions can actually have negative effects. For example, if you name your children as primary beneficiaries when they’re still minors, they won’t be able to receive the proceeds directly. The court system will need to designate a guardian. And that guardian may need to attend multiple court dates. Your children will likely not receive any proceeds in a timely manner. Or if your primary beneficiary relies on Social Security Income or other benefits, receiving a life insurance payout could affect their eligibility to continue getting these benefits.

Know the Laws Where You Live

If you live in a community property state (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin), your spouse may still have legal claim to your life insurance payout. Even if you’re married but, for whatever reason, don’t want your spouse to receive your life insurance proceeds. It’s important to make sure your life insurance policy aligns with your will. Even if the will was recently updated, the beneficiaries listed on your policy will trump beneficiaries named in your will.

Consider the Tax Implications of Your Policy

The proceeds of a life insurance policy are usually tax-free … usually. There is a circumstance, “the Goodman triangle” named after a 1946 court case, in which the policy holder, the insured and the beneficiary are three separate people. In this scenario, the payout could be subject to a gift tax. To avoid issues, make sure two points of the triangle go to the same beneficiary. 
Life insurance is one of the most important investments you can make for the people you love. To make sure you’re protecting the correct people in the correct ways, reach out to SelectQuote for assistance selecting a policy and selecting your beneficiaries.
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