If you’re like most people, you want to make sure that your loved ones are taken care of in case something happens to you. Life insurance can provide that assurance.
This policy is designed to help protect the people who are important to you by providing a financial cushion in the event of your death. Besides, it can give your loved ones the peace of mind they need while they grieve.
While choosing the right plan is in itself a difficult task for many, deciding on who receives the payout can be an even bigger headache. In this guide, we explore everything you need to know about life insurance beneficiaries. Let’s dive in!
What’s a life insurance beneficiary?
A life insurance beneficiary is the person or organization who receives the benefits of a life insurance policy when the policyholder dies. The beneficiary may be an individual or a charity appointed by the policyholder. However, there are some instances in which a beneficiary may not be obvious and is therefore determined through a creative estate planning process.
The beneficiary is free to use these funds to support themselves and their family, pay taxes on the benefits, or invest the funds for future income.
Factors to consider when choosing a beneficiary
One of the most important decisions you’ll make when it comes to life insurance is who will receive your life insurance policy payout. Here, we explore a few key things to keep in mind when making this decision:
First, you should decide who is most deserving of receiving your life insurance money. This could be your spouse, children, parents or siblings. It is important to consider their financial stability and how they would benefit from this payout.
Second, you should also make sure that whoever you choose to be the beneficiary is able to handle the responsibility. Life insurance isn’t something everyone can take on – it can be a significant financial burden if not wisely used. Make sure that whoever you choose is financially capable of handling the policy and any ensuing expenses.
Finally, be willing and able to change your decision should circumstances change down the road. If one of the people you chose to benefit passed away or is no longer in the right frame to handle the policy, be prepared to switch them out for another person.
Sure, changing beneficiaries can be complicated, but it’s worth it to ensure that everyone affected by your death is taken care of properly.
Who can be the beneficiary of a life insurance plan?
Not sure who to prioritize to become the beneficiary of your policy? Here are the key candidates you should consider:
Spouse
If you’re married, it’s likely that your spouse will be the natural beneficiary of your life insurance policy. This is because married couples are generally considered as one legal entity for insurance purposes.
If something were to happen to you and your spouse survived you, they would then be responsible for paying off any outstanding debts and bills as well as taking care of any children or elderly relatives.
Children
A huge percentage of policy holders appoint their children to be the preferred beneficiaries of their life insurance policies. This is because children have a long future ahead of them and will likely need money for schooling and other expenses.
If a parent dies, it can be difficult for a child to manage on their own, so having an emergency fund set aside can make a big difference.
Parents & siblings
There are a few reasons why your family members could make a good option to receive your life insurance policy benefits. For example, if any of them is financially dependent on you, you can choose to let them use your life plan benefits to pay off debts or become financially stable after your death.
Charities & trusts
If you’re thinking of naming charity as the beneficiary of your life insurance policy, there are a few things to keep in mind. First, make sure that the charity is duly registered and in good standing. Additionally, make sure it has a legitimate mission and provides quality services. Finally, go for a charity that is relevant to your values and interests.
Life insurance benefits and taxes – are proceeds taxed?
A question we get asked often by our readers is, do beneficiaries pay taxes on life insurance? To a large extent, yes. For starters, taxation rules differ from one country to the other.
In the UK for example, inheritance tax applies as the main form of tax on life insurance benefits, although that takes effect on amounts larger than £325,000.
We recommend speaking to a financial advisor to find out the rules in your state or country regarding these benefits.
Conclusion
By naming someone as a beneficiary on your policy, you ensure that if something were to happen to you before the policy expires, your loved ones would be able to receive money in your estate. Unfortunately, choosing beneficiaries is not the easiest of decisions but hopefully our guide has made it clearer how to go about it.
Have any questions or feedback for us? Let us know in the comments below.
Also read Essential Things You Need To Know About Family Office Wealth Management