When it comes to discussions of personal finance and planning, many of my clients find life insurance to be a very complicated topic. I fully understand their confusion. Lots of terms and acronyms get tossed around, and if you don't dig into the print and find out what each word means, you can quickly become lost. In my role as an independent financial advisor, I want to make sure you are clear about your policy.
So, let’s take a minute and go over one of the most important life insurance terms: the life insurance beneficiary.
What Is A Life Insurance Beneficiary?
A beneficiary is anyone who is named in your policy to receive the death benefit of the insured when you pass away. You can designate one person or, if you want, two or more people.
There are two main types of beneficiaries: primary and contingent.
A primary beneficiary receives the policy’s benefits after the insured has died. However, if the primary beneficiary dies before the insured, then the contingent beneficiary receives the benefits. When you begin investing in life insurance, you choose who you want your beneficiaries to be.
A beneficiary can either be a specific beneficiary—a particular person—or a class beneficiary—a group of individuals. A specific beneficiary could be your spouse while a class beneficiary could be your children.
There are two methods for distributing the compensation to beneficiaries: per capita and per stirpes. Per capita means “by hands” and per stirpes means "branches of the family." Let's say that you have five children who survive you. In per capita distribution, each of your five children would receive one-fifth of the total sum. If one of them predeceases you, then the survivors each receive one-fourth of the total.
In per stirpes distribution, there would still be five shares, but the surviving children of the deceased beneficiary would divide equally that share.
Consequences of Revocable and Irrevocable
Beneficiary designations can be either revocable or irrevocable. If they are revocable, the policy owner can change the beneficiary.
If the designation is irrevocable, the beneficiary cannot be changed without the consent of that beneficiary.
When a designation is irrevocable, the legal status gets a little murky. It’s possible to view the irrevocable beneficiary as a co-owner of the policy, which means the policy owner can’t make any decisions about the policy without the beneficiary’s consent. This severely handicaps the decision power of the policy owner. Usually, a revocable designation is recommended.
Life insurance should be a key part of your overall personal financial planning. To become familiar with the terms and types of insurance, the Insights section on my website is a good place to start. I'm sure you'll have more questions. Get in touch today!
Material discussed is meant for general illustration and/or informational purposes only, and it is not to be construed as investment, tax, or legal advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon when coordinated with individual professional advice.