In order to ensure your loved ones can claim the life insurance payout quickly and easily, naming the right beneficiary is essential. If possible, name your spouse or adult children as your primary beneficiaries, so they can claim the money directly and without delay.
In any case, you should never name your estate as your beneficiary instead of the person meant to receive financial support, since it enables creditors to access the death benefit. And you shouldn’t name a minor or a pet, either, because they won’t be legally allowed to receive the money you left for them.
Naming your estate as your beneficiary
You shouldn’t name your estate as your beneficiary if you can avoid it.
Life insurance can be an important tool when you’re estate planning. It may be tempting to list your estate as your life insurance beneficiary because you’ve likely already designated how it should be dispersed to your dependents in your will and testament.
But listing your estate as your life insurance beneficiary may prevent your loved ones from receiving the full payout because of how your estate and assets are handled by law after your death.
Instead of being immediately dispersed as you designated in your will, your estate and assets will first go through probate court, where a judge determines what debts you owe.
If you have any outstanding debts, then creditors will first be able to collect repayment from your estate.
Once those debts are settled, the rest of your estate will be dispersed as per your wishes.
By contrast, when the life insurance death benefit is paid directly to your beneficiaries, it doesn't have to go through probate court. This means creditors can’t collect your life insurance policy’s death benefit if they aren’t listed on your policy, regardless of the debts you owe.
By listing your loved ones on your policy, you’re making sure they’re able to claim the death benefit directly.
The only other option to connect your life insurance and your estate is by setting up a trust — any assets included in a trust don't have to go to probate court. But make sure to work with an estate planning attorney and a financial advisor to ensure your belongings and the life insurance payout will be distributed the way you intend.
Naming your children as your beneficiary
You shouldn’t list a minor child as your beneficiary, either, because they won’t be able to claim the money until they’re a legal adult.
If a minor is listed on a life insurance policy when the insured dies, they’ll have to wait until they’re the age of majority in their state in order to receive the money.
The age of majority is 18 in most states, and 19 in Alabama and Nebraska.
In the meantime, the death benefit would be given to a court-appointed guardian to hold onto until your child turns 18 — or 19, depending on where you live.
Usually, this court-appointed guardian would be the remaining parent, but if that’s not the case, then the payout won’t be dispersed until the court determines your child’s guardian. This process could take years depending on the contents of your will and recommended living arrangements of the child, among other factors..
A significant gap between your death and when your children would actually get the payout could defeat the purpose of the policy altogether. This lack of financial security could impact your children’s ability to pay for housing, education, or healthcare.
To ensure your children will receive the life insurance payout quickly, consider creating a trust and naming a trustee who will manage the money from the death benefit on behalf of your children. Again, it’s best to speak with an estate planning attorney before doing so.
Naming your pet as your beneficiary
Because your pet can’t partake in the process required to accept the death benefit — opening a bank account, signing legal documents, or filing a death claim — you won’t be able to list them as the recipient of the life insurance death benefit.
The best way to leave money behind for your pet’s needs, such as food and vet bills, is to set up a pet trust, which can establish exactly how the funds will be used and who will be responsible for your pet.
You’ll need to nominate a guardian to accept the funds and take care of your pet.
This should be someone you trust — but it’s also important that it’s someone willing to take on the job.
Make sure to speak to your pet’s potential guardian before listing them in your pet trust.
Every state and the District of Columbia have laws in place regarding pet trusts. You can find details of how trusts work in your state through ASPCA, but most trusts terminate when your pet dies.
If you have multiple pets listed under your pet trust, then the trust will terminate once the last remaining pet dies.
You should work with an attorney experienced in pet trust laws when setting up a trust for your pet to ensure that your furry friend is well taken care of.
Not listing a contingent beneficiary
A contingent beneficiary is a back-up beneficiary, also known as a secondary beneficiary. If your primary beneficiary has passed away and you have no contingent beneficiary, your policy would be paid out to your estate.
At this point, it would go through probate court, and eventually be paid out to your heirs, assuming there’s money left over after any debts have been paid.
The bottom line
To ensure your loved ones get your life insurance policy proceeds, you should always keep your policy up-to-date and adjust both the primary and contingent beneficiaries with every big life change, like a marriage, divorce, or death.
Changing your life insurance beneficiary is simple and can often be done in your insurer’s online portal. Some life insurance companies may ask that you mail in a change of beneficiary form verifying your adjustments.
If you have multiple people that depend on you financially, you can even discuss whether or not you should set up a per capita or per stirpes death benefit with your life insurance agent — this specifies whether or not your beneficiaries’ heirs will receive a portion of the money if your original beneficiary passes away.
You pay your policy premiums to safeguard the financial security of your loved ones — so it’s important to have the right beneficiaries noted in your policy so that your life insurance coverage does what it’s meant to do. If you need help understanding your life insurance policy or beneficiary details, a Policygenius expert can help.