What to consider when choosing a beneficiary
What factors should you consider when choosing a beneficiary?
It's simple: Fill in the blank on the life insurance application and you've named a beneficiary. But don't write off the task as unimportant. Naming the right person to receive the proceeds of a life insurance policy is an important decision that could have long-ranging effects on your loved ones.
Why is choosing a beneficiary important?
Certain accounts ask you to name a beneficiary, such as life insurance policies, pension plans, and retirement accounts. Upon your death, proceeds from these accounts will typically go directly to the beneficiaries and bypass probate, the slow and expensive legal process of distributing your assets after you pass, which helps your beneficiaries avoid some red tape.
Tips to consider when selecting a beneficiary
- Insurable Interest. The person or entity named as a beneficiary has to have an insurable interest in the insured person. While the insured generally has the right to name any beneficiary, there must still be a legitimate financial interest between the parties. In most cases, beneficiaries rely on the insured for financial support, such as the spouse or dependent children, so there is an apparent financial interest and purpose of insurance between the parties.
- Age. Most insurance companies, pension plans, and retirement accounts will not pay benefits to someone under age 18. A better option is to create a trust for the minor and name a trustee to manage the account until the child reaches the age you specify in the trust.
- Ability to manage money. If your beneficiary is not able to manage money, establish a trust and name a trustee to invest and disburse funds on his or her behalf.
- Contingency. Name a secondary beneficiary so that if your first beneficiary dies before you, the account proceeds pass directly to the secondary beneficiary without probate.
- Options. Your beneficiary can be a spouse, child, or other individual(s); a trust; a charity or organization. If you don't specify a beneficiary, your assets will go into your estate and be distributed according to your will.
- State or policy life insurance beneficiary rules. Some states or insurance companies might restrict who you can name as your beneficiary. Consult an attorney to provide legal guidance for these state specific issues.
- Estate as a beneficiary. It's rarely recommended to name your estate as a beneficiary, since doing so means those assets may be subject to probate.
Don't "set it and forget it"
Because so many things change throughout life, review your beneficiary designations every few years — and always after a life event such as a marriage, the birth of a child, adoption, divorce, remarriage, or death — to make sure they're current. Otherwise, you may risk leaving the proceeds to an ex-spouse or someone who has died before you.
Get specific information about beneficiaries from a legal or tax adviser. Contact your State Farm® agent to make necessary beneficiary designation changes.
Get a quote for term life insurance – if you are interested in additional life products, please contact a State Farm agent.