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Choosing a Beneficiary

Updated December 4, 2016 . AmFam Team

Choosing a beneficiary for your life insurance policy is easy! Here’s what to consider.

You’ve made the smart decision to get life insurance to help financially protect the ones you love. Now that you’ve chosen your coverage, you’ll also have to choose a beneficiary. Here are some pointers to help you decide who should be your beneficiary.

What is a beneficiary?

A beneficiary is a person, a number of people or even an entity, such as a charitable organization, that receives the benefit of a life insurance policy when the insured person passes away. There are two basic kinds of beneficiaries: primary and secondary, also sometimes referred to as contingent.

Find out more about beneficiaries to better understand how they fit into a life insurance policy.

Who should be my primary and secondary beneficiaries?

A primary beneficiary is the first-named beneficiary — or the person who will receive the life insurance benefit if the insured passes away. When choosing your primary beneficiary, there are a number of things you may want to consider.

Financial support. Think about the people you want to protect financially if you’re gone. Usually, the primary beneficiary is the insured’s spouse or the insured’s children, but if there’s no spouse or children, the primary beneficiary is often the insured’s parents or siblings. You can even split the benefit up and have more than one beneficiary.

When choosing a primary beneficiary, consider who will be responsible for paying your debts, paying your funeral expenses and those who will be left without your financial support. Remember, you’re not buying life insurance for you. Rather, you have it to ensure that the ones you support have sufficient financial means in the event you were to pass away.

Secondary beneficiary. With life insurance, you’ll also be asked to choose a secondary beneficiary. The secondary beneficiary is named in case the primary beneficiary is deceased or unable to collect benefits. For example, if the insured and his or her spouse (the primary beneficiary) both pass away, the secondary beneficiary would collect the benefit. The secondary beneficiaries are often children, grandchildren, parents or siblings.

Understand Your Options

Keep in mind, your beneficiary doesn’t have to be just one person or a person at all. You can name your beneficiary as a group of people, a charity or trust  or really, anyone you want.

Group of people. You can designate your beneficiaries as a group of individuals, such as “grandchildren of the insured” or “all children born from my marriage to _____.” Though, be sure that if you choose this route you check with your life insurer regarding their policies around this type of beneficiary designation. Some may have specific requirements such as any adopted children or step children needing to be listed explicitly by name to be included in this type of designation.

Charity. Naming a charity as your primary or secondary beneficiary is a great way to create a legacy in your name. You can designate all or just a portion (for instance, a certain percentage) of your life insurance benefit to a charity, and your agent can help you with the beneficiary designation form to ensure your benefit gets in the right hands.

Creating a trust or designating a custodian. It’s common for parents to want to leave money to their underage children, but there’s more to it than just naming them a beneficiary. Keep in mind, a life insurance company won’t pay a child until he or she reaches the age of 18 or 21, depending on which state you live in. One way to address this situation is to create a trust and name it as a beneficiary. A trust legally holds and protects a person’s or people’s property (such as money) for future distribution to another person.

Another option for designating a minor as your beneficiary is to establish a custodial account, a Uniform Gift to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) account. When you set up a custodial account, you can designate a custodian to manage life insurance proceeds for the benefit of your children until they are old enough to receive the funds in the account. An example of how this might be written into the beneficiary form is as follows:

  • Jane and Jessica Doe, daughters.
  • UTMA: Joseph Doe, brother, as custodian.
  • Jacqueline Doe, sister-in-law, as substitute custodian.

Of course, your best bet is to work with your agent to ensure your beneficiary designations are written as you intend.

Review Your Policy

Life happens, and sometimes that means big changes. Divorces, marriage, more children — all times you’ll want to consider updating your life insurance beneficiary. Don’t put off reviewing your policy and risk not having exactly who you want as your beneficiaries.

We’re here to support the big dreams you have for your family. Check out our life insurance coverages to learn more about your options, and if you have any questions, connect with your American Family Insurance agent to get you on the right track to protecting the people you love most.

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