The answer is A: Beneficiary. Let’s take a look at the role of Beneficiary in Life Insurance.
Simple Guide on Beneficiaries
As mentioned above, any person who receives the financial aid from the life insurance plan is known as a Beneficiary. The other people who are part of life insurance contract are the insured and policy owner.
Often the insured and the policy owner are the same person. An official insurance contract includes an insurer, policy owner, and the beneficiary as the major parties.
While the insurer and the policy owner stays permanent, the beneficiary is the one that can be easily changeable. Many people go through the process of choosing the name of their beneficiary in a new life insurance policy.
Assuming the fact that the designation for the beneficiary is changeable, you can easily change the name in the later stage as well.
According to the Merriam-Webster definition of the term beneficiary, ” the person named in the policy to receive benefits”. The beneficiary is chosen at the inception of the policy by the policy owner.
There are different important considerations while selecting the beneficiaries; such as Who is the Beneficiary? Can the name be changed later on?
Does changing require the authorization from the beneficiaries? In addition to these primary considerations, the other considerations include the order to specific rules and payout in case beneficiary is not alive.
Types of Life Insurance Beneficiaries
There are three ways to categorize the beneficiaries for the life insurance policy. These are categorized as:
3. Strict Legal Types
1. Order of Beneficiaries-
Order of Beneficiaries indicates the strict order of receipt of gains, and also known as Beneficiary Level.
The primary beneficiary is the first person to receive the benefit upon the insured person’s death. The primary beneficiary can be single or multiple. In the case of multiple beneficiaries, there are different ways of splitting up the final benefits.
The primary beneficiary receives the payout in case of the death of the insured person, but in case the primary beneficiary dies before the insured person dies and if the contract has not been changed, the second beneficiary receives the payout.
The contingent or secondary beneficiary will only receive the payout if the primary beneficiary is not alive. Else they have no rights to get any benefit and hence they are important when time happens and things may change.
When you start your life insurance policy, you also have the ability to set up the option for changeability to make it easier of difficult to replace the beneficiaries.
This option allows the policy owners to change the selected beneficiary at their own will. It doesn’t require any permission from the beneficiary.
This option allows the policy owners to replace or change the current beneficiary after consulting and taking the consent. This is much complicated and rare selection of choice.
3. Strict Legal Types
The policy owner can add multiple beneficiaries for a single policy by the percentage allowance. This can often get complicated but considered to be the right thing while naming the multiple children.
The problem can only occur when out of all one of them one dies. It’s still unclear if it gets passed down to the deceased’s children or gets an equal portion of the payout to remaining beneficiaries.
This option indicates that no one except the selected beneficiary receives the policy share.
This indicates that share of the beneficiary will be paid to his or her heir in case of the death of that beneficiary.
Prospective Beneficiary Options
While setting up an insurance policy, the people that you can consider selecting to be the primary or secondary beneficiary are as follows:
One of the most common choices of who to choose as the beneficiary of your life insurance is your spouse. This option is the best option especially at the beginning when you have less money and children in your family.
Selecting children is also one of the initial choices for the beneficiary of your insurance policy. However, it is not suggested to select children who are underage as the primary beneficiary because, in case of the death, the court will appoint the trustee who would manage the funds for the children.
Brothers and sisters are also selected as the primary beneficiary and are considered to be an excellent choice for all the unmarried people who don’t have children.
4. Your Friend
You can also select your friends as the beneficiary for your insurance policy. Though it’s not really common, but for the people who aren’t married or do not have children, it’s a logical option.
5. Business Partner
A business partner is not recommended for the personal insurance policies but it is practical and the most useful thing to do in case of business policies.
The life insurance policy can be used s the funding mechanism for the previously agreed transaction in case of a partner’s death.
You can also select a revocable or irrevocable trust as the life insurance beneficiary. This needs to be only done after discussing the situation with your personal attorney.
While seleting the trust, insurers need to have a lot of information about the trust, their work and their start date.
Things To Watch Out For
The life insurance policies, in general, are straightforward, except when people do irrevocable things. A normal revocable policy can be changed multiple times during the term of insurance policy.
However, when you use the irrevocable trust with different cash value insurance policies, it may get very complicated. Make sure you understand all the things properly and know what are you opting for and what decision cannot be changed afterwards.
That is the reason why revocable trusts are popular, and they are changeable to a certain extent.
To summarize, the person on an individual who received the financial aid from an insurance plan is known as Beneficiary. These beneficiaries come in a few different types and forms.
As long as you do not select the irrevocable insurance policy, everything is simple, and you can make necessary changes anytime in the later stage.
- About Life Insurance and Beneficiaries: Taken from wikipedia.org
- Types of Beneficiary for Insurance Policy: Taken from cpp.ca
- Personal Financial Management- Insurance: Taken from Introduction to Finance: Markets, Investments, and Financial Management By Ronald W. Melicher, Edgar A. Norton