Beneficiaries

Life insurance is an insurance policy that provides protective cover to your beneficiaries in the event of the policyholder’s untimely death. There are three parties to a life insurance policy viz.

• The Insured – i.e. the person who has bought the life insurance policy. In case of death of the insured, beneficiaries are paid the death benefit.
  
• The Insurer – i.e. the life insurance company that has issued the policy. The insurer can make changes to the policy with the insured’s consent except in certain situations concerning beneficiaries who are permanently named and cannot be changed without the policyholder’s permission. Insurance companies can provide different kinds of insurance policies such as term life insurance, whole life insurance etc.
  
• The Beneficiaries – On death of the insured, beneficiaries receive money of the death benefit. Beneficiaries however do not have control over the life insurance policy until they are policy owners or have been nominated as irrevocable beneficiaries.
  
• The Owner of the Policy – Policyholder in most cases is owner of the policy by default. This is how most standard life insurance policies are set up. However in some situations someone other than the insured is named as owner of the policy. For example when a parent takes out a life insurance policy on their son or daughter she may be the owner. Thus the beneficiary and owner of a life insurance policy can be the same person but would have to face tax problems if that is the case.

All life insurance policies require a beneficiary. Most people do not understand the importance of naming a beneficiary and simply name a spouse and child forgetting the whole matter immediately. Choosing a beneficiary and keeping the choice up to date is vital. Named beneficiaries are immediately paid value of the life insurance policy. The word of beneficiaries’ designations is also very significant. Inappropriately named beneficiaries can have drastically negative effects on how the insurance proceeds are distributed. For example an ex-spouse might end up receiving proceeds if you simply name your spouse by designating husband or wife. In the event of separation it is essential to analysis insurance beneficiaries’ designations. Unless beneficiary designation is changed naming specific children, children born later are sure to be left out. ‘Children of the insured’ would only include your children from your current wife/husband, leaving out your children from previous wives/husbands.

Most experts do not consider it prudent to name minor children as beneficiaries. Instead you should name a guardian for minor children along with a trustee to manage insurance proceeds and other assets till they are mature enough to look after their own money. In the same way, if a child named as beneficiary dies before you, you would want his part to be transferred to other children. This should be explicitly stated in the policy. It depends on the policyholder as to what she plans to give each child i.e. whether your grandchildren would equally share the policy’s proceeds with your children or they would split their parents respective share. It is important to foresee as many circumstances as you possibly can. It is not significant to just go through your beneficiary designation on a regular basis. You have to remember to change your beneficiary title. You can change your policy’s beneficiaries as often as you want until you have made a binding designation as in the case of divorce settlement. You should change the policy’s beneficiaries only when it is appropriate and not based on emotional reasons only.