Your term life assurance and beneficiaries

The reason you are buying a life insurance policy (in this case a term life insurance policy) is to secure your family’s future in the event of your death – for them to pay for major debt (such as a mortgage or credit card debts), meet with the usual household expenses and continue enjoying the lifestyle that you worked so hard to give them.

Beneficiaries Defined

Primary beneficiary: The first line of beneficiaries – if the primary beneficiaries outlive the Person Insured, they will receive the Benefit Amount according to the percentage specified by the Person Insured.

Secondary beneficiary: The second line of beneficiaries. They will receive the Benefit Amount if there are no surviving primary beneficiaries.

Irrevocable beneficiary: These are designated beneficiaries where changes cannot be made to their being a beneficiary (i.e. removal, change in percentage share) without the beneficiary’s consent. Irrevocable beneficiaries are designed to protect their share of the benefit amount, since this is not considered a direct part of the Person Insured’s estate.

Revocable beneficiary: The details (inclusion, percentage share) can be changed anytime the policy owner prefers.

Per Capita and Per Stirpes. This is to list all possible beneficiaries. For instance, a parent can name “all my children” (both born and those yet to be born) as the beneficiaries. You can also designate the percentage share.

Naturally, you would want to ensure that your loved ones’ interests are well-protected even when you’re no longer around to do this for them. It would be tragic for beneficiaries to find roadblocks to their right to claim the insurance proceeds just because the list of the policy’s beneficiaries was set up improperly.

Naming Minors as Beneficiaries

It is tempting to name minor children or grandchildren as beneficiaries in the policy. But you have to first ask your insurance agent about how your state will treat this situation. In some states, the proceeds of the insurance may not be immediately given to the minor beneficiaries until they come of age. Usually, it will take you time and some money for the beneficiary to take hold of the proceeds. Some states will require the court to assign a guardian or custodian (and this guardian or custodian may not be the person you want to have control of the proceeds).

Another consideration is that your children or grandchildren may be too young and incapable of responsibly handling a large amount of money. If given access to the money at so early an age, the money may actually do more harm than good. The usual result would be that the money will not be spent the way you wanted it to be spent.

Rather than naming your minor children as beneficiaries, you can establish a life insurance trust which you can establish through your will. The trust will ensure that the insurance proceeds are spent the way you want it and are supervised by the persons you choose.

Naming Contingent Beneficiaries

A contingent beneficiary is one that receives the proceeds of the life insurance if all the named primary beneficiaries are also dead. If a contingent beneficiary is not named, the proceeds of the insurance will go to your estate. That makes the money taxable.  The contingent beneficiary is like a “spare wheel” – naming one will not affect the policy. The contingent beneficiary will kick in when there are no primary beneficiaries to make the claim.

Naming the Estate as the Beneficiary

Only in very specific and rare situations would naming the estate as a beneficiary be a good idea. Doing so could tie up the insurance proceeds so that your beneficiaries cannot get to the money unless all the debts of the estate are paid for. This may mean that the money can be used up to pay for the debts and so not all the money will go to the beneficiaries. Naming your beneficiaries will protect the insurance proceeds so that creditors will not be able to have access to it. Also, naming the estate as the beneficiary will result in making the insurance proceeds taxable.

Naming Irrevocable Beneficiaries

Having irrevocable beneficiaries is ideal for estate planning purposes. This is to protect the proceeds of the life insurance and make sure that the beneficiaries are the ones who will receive it, rather than the estate. This is because the estate is subject to attachment from any creditors. Before the estate is inherited by the beneficiaries, all existing creditors can “run after” the amount owed them.

However, it is also important to consider who you will name as irrevocable beneficiaries. Since any changes related to their being a beneficiary or their share in the Benefit Amount, you may be left with unintended beneficiaries, in the event that you and your spouse divorce or dissolve a civil union.

Policyholders and Their Beneficiaries

Based on a 2011 Nationwide Financial Services, Inc. survey of 805 Americans:

  • 70% of policyholders are confident that their beneficiaries are able to file a claim in the event of the Insured’s death.
  • 84% talked about the life insurance policy with their beneficiaries.
  • 53% discussed the amount of insurance.
  • 47% discussed who the beneficiaries of the policy are

Regularly Reviewing Your Policy

Be sure to review the policy once every couple of years to check whether the beneficiaries you named are still the ones you want at the current time.

Please note that these tips apply to general situations. It is best to consult your accountant or professional advisor to provide counsel with regards to your particular situation.

Keeping Your Beneficiaries Informed

One of the issues that beneficiaries are left with is that they don’t even know that they are beneficiaries in the first place! Of course, the Insurance Company can inform them of this but the Policy owner’s failure to keep the beneficiaries’ contact details updated may make it harder for the company to provide the official notification to the beneficiaries. Also, the insurance company will not usually realize that there is a need to notify the beneficiaries unless someone also notifies the company. A real chicken and egg situation, huh?

This can be avoided if you, as the Person Insured, should inform your beneficiaries about:

Updated on: 05.06.2013

To secure your family's future, fill in the form on the right and get your term life insurance quote now.

Types of insurance:
Term life insurance 101:
Life insurers:
*Scottish Provident 2012 life cover claims paid report.