How important is beneficiary designation in life insurance?

Beneficiary designation is one of the most vital questions one will face when signing their life insurance policy contract. Remember the beneficiary is the one who will receive the policy proceeds in the event of your death so choose them with utmost care! Make certain all documents are concise and comprehensible because you will not be here to throw light on them.

Here are some tips to help you with this tough decision:

• Name a primary beneficiary and a secondary beneficiary. The primary beneficiary is the first person or entity entitled to the policy proceeds at the event of your death. The secondary beneficiary is entitled to the proceeds if the first beneficiary dies before the insured.

• If you choose to designate multiple beneficiaries, you should specify how you would like the death benefit to be distributed among the beneficiaries.

  You can choose the Per Capita definition according to which if a beneficiary dies before the insured, the rest of the beneficiaries will equally divide that share of the proceeds upon the insured's death.

  The Per Stirpes definition passes the proceeds upon the beneficiary's descendants when the insurer dies.

• If minor children are named as beneficiaries, bear in mind that they cannot receive the proceeds directly unless they are at least 18. Either name a guardian in the will, who will receive the proceeds, or have the proceeds paid to a trustee.
• Most policyholders choose to designate revocable beneficiaries, which gives them the freedom to change the beneficiary at their discretion without the beneficiary's consent.

• You can either designate the beneficiary by name or by class.

  Although specific beneficiaries are preferred by the insurers, there is the danger that someone who would normally be in their right to get part of the proceeds will be ignored. For instance, a former wife who has been specified as the primary beneficiary might end up receiving the proceeds if the insured has forgotten to change the beneficiary.

  Class designation, too, should be applied with great care and some insurers restrict its use due to the problem of identifying members of a class. All insurers allow the naming of children as a class, and yet, depending on the wording used, this class designation can in some cases apply to all children, whether legitimate, illegitimate or adopted, or exclude one of these groups.

• Term vs. permanent life insurance – which should I choose if I am looking for long-term life insurance?
• Do I need to pay federal income tax on life insurance proceeds?
• What are they looking for in life insurance blood test?
• What are the advantages of a life insurance-funded buy-sell agreement?
• Whole life vs term life – what is the difference between term and whole life insurance?