A life insurance policy is usually purchased with the intention of providing a financial safety net for your dependants should you die within the policy term. Your family can use the money to pay off debts, including mortgages, or as a regular income in order to maintain their current standard of living.
There are different types of beneficiary named in your life insurance policy. The first are the primary beneficiaries who, as long as they outlive the individual who is insured, will receive a specific amount of the pay-out as specified in the policy document. There are also secondary beneficiaries who will receive a pay-out if there are no primary beneficiaries left alive.
Beneficiaries are then split into two different categories; an irrevocable beneficiary, and a revocable beneficiary. An irrevocable beneficiary is one who cannot be subject to any changes, for instance, a change in the percentage share, or removal from the policy altogether. As the name suggests, revocable beneficiaries can be changed, at any point, if the policyholder so wishes. In common with irrevocable beneficiaries this can be a change in the percentage of the pay-out they are designated to receive, or removal from the policy altogether.
When setting up your life insurance plan you can use the term ‘all my children’ to stipulate that you wish all your offspring (both born, and yet to be born) as beneficiaries, and you can assign their percentage share of the funds. It is possible to name individual children as beneficiaries although different countries have different regulations with regard to this. Many will state that the proceeds of your life insurance policy can only be passed to the child when they reach a certain age, and some will insist that a custodian or guardian is appointed to take control of the funds. Unfortunately, you have no control over who this custodian or guardian might be, and he or she may not be someone of whom you approve.
If you are considering naming a child as a beneficiary also take into account that if local regulations state that the child can have immediate access to the money, regardless of their age, they may not be responsible enough to deal with having such a large amount of money at their disposal. The result could be that the money would not be spent in the way that you hoped it would be, and it could, in some circumstances, do more harm than good.
An alternative to naming children as beneficiaries is to set up a life insurance trust which can be incorporated as part of your will. This will ensure that the money is spent in such a way that you decide, and that if a custodian or guardian needs to be appointed it will be someone of your choosing.
In the event that you have outlived all of your beneficiaries, both primary and secondary, then all proceeds of your life insurance policy will be passed on to a contingent beneficiary if you have one. It is certainly advisable to name a contingent beneficiary as if you do not have one the insurance pay-out will be transferred to your estate. In this case the money would then be subject to tax.
It is possible to name your estate as the beneficiary in your life insurance policy; although this would only be a good idea in certain circumstances. If your estate was named as the beneficiary then any debts that you owe would first have to be paid out of the proceeds of your life insurance. This would mean that your dependants would not receive the whole pay-out if you owe money to creditors. By naming your beneficiaries individually, and not stipulating that your estate is the sole beneficiary, you will ensure that your creditors will have no right to claim any of the pay-out, and also that the money will not be subject to tax.
Deciding who your beneficiaries should be can be difficult, especially when naming irrevocable beneficiaries as these cannot be changed. Irrevocable beneficiaries are important as they protect the proceeds of the life insurance policy and ensure that the money is not automatically passed onto creditors. However, during our lifetime certain relationships break down, and this could result in a former spouse, for example, being a primary beneficiary in your life insurance policy when you would rather this not be the case.
If you do have a life insurance policy in place then it is important to review it regularly to make sure that the revocable beneficiaries are still the ones that you wish to have in place. It is also important that you inform your beneficiaries that they are infact beneficiaries of your life insurance plan initially, as in some cases individuals have been unaware that they have been named. Also remember to keep the contact details of all your beneficiaries up to date to ensure that your insurer can provide them with an official notification in the event of your death.
Many insurers will presume that your beneficiaries are aware that they have been nominated so will not contact them as a matter of course. To avoid any discrepancies later on make sure that you inform your beneficiaries of the sum insured, the location of the documents, and the name of the insurance company.