Other than the Life Insurance Policy, the question of naming a beneficiary is generic – cutting across all insurance types. Just before we examine how naming a beneficiary works or who’s worth it, it is quite customary that we define the term.
Who is a Life Insurance Beneficiary?
A life insurance beneficiary is one who is to receive the claim amount and other benefits upon the death of the benefactor.
In other words, we refer to a beneficiary as one who is eligible to receive (financial) compensations following the death of a policyholder.
By ‘benefactor’, ‘policyholder’ and ‘insured’, we refer to the same individual who has their name on the life insurance policy.
Life Insurance Beneficiary Rules
Two things we can infer from our definition: First is that; the policyholder names beneficiaries. We have used ‘beneficiaries’ in this context, yeah? The implication of this is that; one or more people can have their names as beneficiaries in a life insurance policy.
Second: For life insurance policies and their payouts, the death of the policyholder is usually a constant factor.
Put more clearly, if a policyholder passes on, entitled persons listed by the insured will receive compensation by the insurance company, and this is a reason to have an insurance policy in the first place
Technically, no one likes to think about death. However, the decision to secure a life insurance policy could save a fortune for our loved ones.
Choosing what kind of insurance policy to buy can be as challenging as naming a beneficiary.
Kinds of Life Insurance Beneficiaries
There are two basic kinds of beneficiaries at the Life Insurance Policy level. One the one hand, we have Primary and Contingent Beneficiaries; on the other, Revocable and Irrevocable Beneficiaries.
1. Primary Beneficiaries
Ideally, its name does the trick. Beneficiaries named in this category are usually ‘first-choice’ candidates. Legally, Primary Beneficiaries are.
2. Contingent Beneficiaries
Persons who fall in this category are ‘Secondary Beneficiaries’; like the ‘back up’ plan.
Here, contingent beneficiaries are considered when the ‘Primary Beneficiary’ is unavailable to receive the benefits from the life insurance policy. This may be feasible if the Contingent Beneficiary predeceases the policyholder – or if they are deceased as well.
3. Revocable Beneficiaries
The choice of who maintains a revocable or irrevocable status as a life insurance beneficiary; resides with the policyholder. Revocable beneficiaries are ‘temporary’; until the policyholder names or acts otherwise.
The revocability of this status implies that it can be amended at any point in time. As a young millennial who isn’t married yet without children, you could decide to name a parent as a ‘Revocable Beneficiary’.
This parent holds this status until you have made resolutions to remove them; say when you eventually get married, for instance.
4. Irrevocable Beneficiaries
While amendments can be made to a ‘Revocable Beneficiary’ document, ‘Irrevocable Beneficiaries’ are what they are – Irrevocable. This means you cannot make edits or amendments to the status of an Irrevocable Beneficiary unless they approve of it.
This is common among divorced couples, for instance. If you have named your spouse as an irrevocable beneficiary and you split in the future, you would need their approval before making changes to the policy.
It important that policyholders take their time in naming their beneficiaries to avoid complications as this in the future.
Other Things To Consider When Naming a Beneficiary
- If you’re considering naming multiple beneficiaries in your life insurance policy, you could allocate the benefits via percentage. Alright, let’s make this clearer: Say you’re a father of two and you have named your children as your sole beneficiaries, you could choose to split the benefits into equal halves; 50:50. If one of your children passes away before you; however, the other child gets 100% of the policy benefits.
- There are conditions to naming a minor (one who isn’t legally an adult) as your beneficiary. Until they come of age, you could name a guardian on their behalf. The guardian would be responsible for such a child until the law or (insurance company) recognises them as fit.
- If you’re considering making changes to your choice of life insurance beneficiaries, you could reach out to your insurance company. A beneficiary change form is issued; make necessary changes and return to them.