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Why you should review your life insurance beneficiaries

Review your life insurance beneficiaries

Life insurance is an important part of your family's financial planning. The death benefit the insurance company distributes can help your family pay for burial services and continue to pay the bills in your absence.

However, reviewing your life insurance policy and stated beneficiaries regularly is essential because your needs and situation will change over time.

Learn about the importance of establishing and reviewing your beneficiaries along with the two main types of life insurance.

Permanent vs. term life insurance

Life insurance can be broken down into two main types: permanent life insurance and term life insurance. Each has its own set of advantages and disadvantages, and you'll need to decide which option works best for you.

Here's a basic rundown of each:

  • Permanent life insurance provides coverage that will last as long as you pay your premiums, and it is intended to exist for the duration of your life. There are different options within this category including whole life insurance, which provides a guaranteed rate and death benefit, and universal life insurance, which allows you to alter the policy depending on your financial or health situation.
  • Term life insurance only lasts for a set period of time, usually in increments of five, 10, 20 or 30 years. This option gives you control over the length of your policy, which is important if you'll only need coverage for a set period of time. However, there isn't an automatic payout at the expiration of your term, which means you could leave some money on the table.

Life insurance beneficiaries

A life insurance beneficiary is the person who will receive the death benefit when you die. There are two different kinds of beneficiary designations:

  • Primary beneficiary: the person who will receive the life insurance payout.
  • Contingent beneficiary: the person who will receive the payout if the primary beneficiary cannot.

You can have multiple primary beneficiaries, in which case you'll need to specify the percentage each one will receive. You should also have several contingent beneficiaries in the event your primary choices are unable to accept the payout.

Be specific when naming beneficiaries

When naming your beneficiaries, be as specific as possible. Be sure to give their full name -- along with any other pertinent personal information, such as a birthdate -- as opposed to just the relation to you. For example, simply putting "wife" or "husband" as your primary beneficiary could lead to disputes if you get divorced and remarry after first creating your policy. Just writing "children" as your beneficiaries isn't a good idea either, as your children might have disputes about what they deserve. Both of these instances will likely land all parties involved in probate court.

Listing "estate" as your beneficiary can also lead to problems. This "should be avoided at all costs because it then throws the life insurance proceeds into probate and, depending upon the state, could subject it to the creditors of the estate," says Donald Reichert of Capital Design Associates, a wealth-management firm based in Greenville, South Carolina. This would be the worst possible outcome, as the life insurance payout wouldn't go to the family at all.

So, in addition to keeping your beneficiaries up to date, make them as specific as possible to avoid potential legal snags.

Review your beneficiaries and policy

Regardless of which option you choose -- term versus permanent -- and who is listed as your beneficiary, it's wise to review your life insurance policy regularly.

"Review your policy annually because your financial and life situations change," says Chris Huntley, director of marketing for JRC Insurance Group, a San Diego-based agency that specializes in life insurance coverage. Additionally, you should review your beneficiaries and policy when you:

  • Change jobs. A change in employment could mean a change in lifestyle.
  • Increase your income. You may be able to afford a more expensive policy with a larger death benefit.
  • Get married. You may want to revise your policy so your spouse is listed as a beneficiary.
  • Have a child. Decide if you want your kids listed as beneficiaries.
  • Buy a house. You may want to increase your life insurance policy to cover the expenses of your mortgage.
  • Get divorced. Decide if you no longer want your ex-wife listed as a beneficiary.
  • Retire. Review your policy once you retire to decide if you still need it.
  • Move out of state. If your cost-of-living expenses increase or decrease depending on where you live, you can update your life insurance policy accordingly.

Help avoid probate

If you don't name a beneficiary, then your life insurance payout can get tied up in probate. Probate is a court proceeding designed to decide who will receive the life insurance payout. The probate process is lengthy and complex, and it can get messy if there are a lot of different people claiming they're the beneficiaries of your life insurance policy.

"Probate happens when the beneficiaries are not in place," says Brad Cummins, founder of Local Life Agents, an independent insurance agency in Arlington, Ohio. "The whole purpose of naming a beneficiary is so the death benefit goes directly to the beneficiary and skips the time-consuming probate process."

If you have a life insurance policy or are considering taking one out, then review your policy annually or at major life events. Keeping your beneficiaries current and specific is vital to ensuring your money will go where you want it to and that your family will be protected.

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