Choosing a Life Insurance Beneficiary: What You Need to Know

Choosing one or more beneficiaries is an important step in purchasing a life insurance policy. After all, your beneficiary is probably the reason you have life insurance in the first place.

“Often, the reason to buy life insurance is if you have people that are dependent on your income stream,” explains Sheryl L. Rowling, CPA/PFS and head of Rebalancing Solutions at Morningstar. Other key reasons are to cover your final expenses or leave a gift to a charity or other organization.

If you are thinking about purchasing a life insurance policy, here are some things to think about when choosing your beneficiary.

What is a life insurance beneficiary?

Your life insurance beneficiary is the person or organization that receives the death benefit from your policy.

Almost anyone can be a life insurance beneficiary. Some typical examples of life insurance beneficiaries include:

• A person, such as your spouse or a relative
• Multiple people, including your children
• A trust
• Your estate
• A charitable organization
• A legal entity, like your company

You may have more than one beneficiary, allocated either by dollar amount or percentage of the policy benefit; you may even have contingent beneficiaries, to whom the benefit proceeds cascade in the event that your primary beneficiary dies before you.

Remember that It’s okay to change your mind. As long as you’re still living, you can always change your beneficiary. As your personal life changes, as your family grows, and as your needs evolve, you can change your beneficiary at any time.

Questions to consider

In order to choose a beneficiary wisely, you first need to consider what type of insurance you might need and why. The following questions can help you determine what type of insurance is right for your situation and how much you might need, which in turn should help with deciding whom you choose as beneficiary.

• Am I looking to replace my income stream and help provide financial security for a spouse or partner?
• Do I have minor children whose expenses I wish to help cover?
• Do I have adult children who rely on me for financial support, or to whom I want to leave a legacy?
• Do I have debt that I want to help my family cover when I’m gone?
• Who would need to cover costs associated with my death, such as funeral expenses?
• Who would I like to leave money to regardless of whether they rely on me, such as a charity or a trust for my children?
• Do I have aging parents who will no longer have me available as a caretaker?
• Do I want to be buried or cremated? How much will be needed to cover my burial or cremation costs?

Communication is critical

Once you’ve chosen an insurance policy and selected a beneficiary or beneficiaries, there’s still one critical step to take: informing your named beneficiary. It’s probably best to do this before finalizing the paperwork on your policy.

Having this conversation with your beneficiary can be stressful and uncomfortable. You’ll be addressing your own mortality and discussing what will happen after you die, likely with someone with whom you have a close relationship. But keeping a few simple things in mind can tackle the taboo and help this conversation go smoothly as you talk about matters of life and death.

“It is a very delicate conversation, and people just don’t want to have it,” says Mitchell Freedman, CPA/PFS. “They like to have financial protection, they like to feel comfortable that they’re providing for their heirs, but generally speaking they don’t want to actually talk about it.”

Facing our own mortality is difficult; facing the mortality of a loved one can be even more so. However, it is important that your beneficiary is not blindsided when the time comes. The kind and considerate thing to do is to gently prepare them. This can be an easy, practical conversation about the basic steps to take in the event of your death. By focusing on the following three areas, you can help make a difficult conversation much more comfortable, ensuring that all parties are properly prepared for the future.

Leave a paper (or digital) trail. Tell your beneficiary your life insurance policy details. There is no need to keep this information secret! Let them know who holds the policy, what they need to do to file a claim, and where copies of the paperwork are kept. (A safe deposit box at a bank, a fireproof safe at your home, or even a PDF copy on your computer are all good options. If you have an estate planning attorney, they should keep a copy as well.) Remind your beneficiary that they will likely need to provide a death certificate when they submit the claim, and that they should consider whether they will want to receive the payout in a lump sum or installments.

Share your final wishes. Your beneficiary isn’t a mind reader. Tell them what you want them to do with the money and why you chose to leave it to them. Perhaps you want to help pay for college education, provide a down payment for a house, or help them start the business they’ve always dreamed about. They don’t necessarily have to use the benefit for the purpose you chose, but it may help them process their grief and make the best use of the benefit. “It’s not trying to control from the grave, but rather to say the reason I named you as a beneficiary is because I really would like to help you,” says Freedman.

Remind them why. Now it’s time to let a little bit of emotion in, if it feels right. Your beneficiary may wonder why you’ve chosen them, or express discomfort with the idea of benefiting from your death. Your goal in addressing this uncomfortable topic should be twofold: practical preparation and being open about the importance of your relationship, both in life and in death. This is about showing them that even after you’re gone, you’ll still be looking out for them — and that, by naming them as a beneficiary, you’ve been looking out for them all along.

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