Considerations when choosing a life policy nominated beneficiary
By Farai Francis Zhara
Choosing a life policy nominated beneficiary is a field many people are tempted to overlook when filling the proposal form but this is an important decision. You buy insurance because you have a reason for the payout, maybe to provide funds for your family to pay bills or to pay for children’s school fees and therefore these reasons will translate into naming a beneficiary to receive this payout. Even though beneficiary is your choice, but it is also an important choice and should never be made lightly since it is part of your legacy.
When choosing a beneficiary think of it as one of the remarkable times in your life when you and only you get to decide what the right choice is. After all, this is your own decision and you can do as you wish, instead of having to gratify someone else. You may offend some people with your choice but they cannot do anything about it. Unless you tell them, they probably will not find out that they are not your life insurance beneficiaries until after you die.
Think of naming a life insurance beneficiary as a way to give your money to who you want and focus on people who will most need the payment if you die. That is the person or persons most dependent on your income. You can nominate individuals, trusts, charities and other organizations and your estate. You might specify one or more people, or name a specific group of individuals, such as “all my children” This might include current and future children and spare you from having to update forms as family change.
There are many options when choosing beneficiaries. These range from one to several beneficiaries, and different ways to divide up the money they will get: One way is per capita, in which case the amount is split equally between all beneficiaries, often the children. Or can be split according to given ratios as per your preference. Another is per stirpes, this means that if a child predeceases the policyholder then his or her children receive what would otherwise be shared among the living children.
When the policyholder is alive beneficiaries can be changed at any time. It is therefore a good idea to review this at least once a year. Your likes and dislikes can lead to change of mind. For example, you might want to pay more to the one who assisted you most when you were ill and probably remove the one who ignored you when you were in need. Divorce and remarriage can also lead to choice changes and so keep it up-to-date.
One of the most common mistakes with a life insurance policy is not keeping the beneficiaries up-to-date. Say you name your parents as beneficiaries, but later on you get married. If you do not update the beneficiary on your policy, then the proceeds will still go to your parents and nothing for your spouse and children.
Some policyholders simply cannot remember whom they named as beneficiaries of accounts they opened years ago. This is not right. At one time, a man nominated his girlfriend as beneficiary and forgot to update when he later on married someone else leaving his entire estate to his longtime ex-girlfriend.
Avoid naming a minor as a beneficiary. If a beneficiary is a minor, he/she will not be able to have the payout directly. The money will be held up while the court will appoint a guardian to look after the funds. Appointing a beneficiary is a lengthy cumbersome and often boring process since it typically requires multiple court dates. Avoid this by either designating an adult or setting up a trust you trust to oversee the distribution of the money to the minor. A trust executor will claim the money and allocate it according to your wishes.
When choosing a beneficiary, keep the objective of the policy in mind. The reasons for buying the policy should drive your beneficiary choice. If it is to provide financially for your family after you die then you may choose your spouse. If it is about your company then you might choose your business partner.
When choosing a beneficiary, widen your choices at first then narrow them later on but giving reasons. There are more alternatives than your spouse or children. You can nominate any one or more of these: a single person, two or more people (decide on split ratio), the trustee of a trust you would have established, A non-profit or charity or your estate.
You must come up with a back-up option after naming your beneficiary. Think as to what will happen if your beneficiary cannot be found or refuses to get the payout or is deceased. There is therefore the need to have a contingent beneficiary who will then become the recipient in such scenarios.
Do not count on your will to override your beneficiary choices. You must make sure your wishes are honored by having your will match your life insurance policy. If you update your will, update your policy and vice versa. If your will and life insurance beneficiaries do not match, your life insurance beneficiary will emerge victorious. Life insurance is a contract therefore it will be enforced as it is written.
If you do not designate any beneficiaries or in the event that all of them predecease you, proceeds will be paid to your estate. If that happens, the court will decide how to handle the funds. This could take a while and possibly chip away at the proceeds. So you must get the money into the hands of those who need it as soon as possible by nominating the policy beneficiary.
Farai Francis Zhara holds an MBA from the National University of Science and Technology and a BCom from Midlands State University. He is a certified client services practitioner with over a decade in the insurance sector. He writes in his personal capacity. [email protected]