When my dad Doug passed away unexpectedly in 2017, he left behind two daughters, the family business and a house full of books and Phillies baseball memorabilia. He also had a couple of life insurance policies and an Individual Retirement Annuity (IRA), on which he named my sister and me as the primary beneficiaries.
Luckily for us, Dad bought one of his insurance policies not long after he and our mom Kathy got married, to make sure she and their child, who was on the way (me!), would have funds to fall back on in case something happened to him. Once he started working with his parents at the family business full time, he opened an IRA to start saving for retirement. Then, our family grew, he took over the family business after his parents retired, and he decided to purchase another life insurance policy. At the beginning, he had named my mom as the beneficiary of all of these, but then when they divorced, he changed the beneficiary designation to my sister and me.
So, what does all that mean? Aside from suddenly becoming co-owners of the family business, it meant that as the beneficiaries we could claim the death benefits from our dad’s life insurance policies and IRA. Those funds were very helpful to my sister and me, because it gave us wiggle room financially as we decided which of us would take over the business and which would buy the other out.
That’s my family’s story. You and your family may not be much like mine, but some of the basics may be the same. Your family may need financial support after you’re gone. No matter what your situation may be, it’s vital to understand the importance of life insurance and know what a beneficiary is and why it’s important to you!
What is a beneficiary?
When you apply for a life insurance policy, you’ll be asked to name a beneficiary – this is the person or legal entity that you would like to receive the proceeds from your life insurance or annuity policy after you pass away. A “legal entity” in this case can means your trust, your business, your favorite charity, your estate or any other organization that has a tax ID number from the IRS.
How do beneficiaries work?
When you pass away, your beneficiary(ies) will be able to file a claim for your policy and collect the proceeds. Typically, they’ll need to complete a form with some information about themselves and provide your death certificate.
Why are beneficiaries important?
You’re providing your beneficiary(ies) with financial support after you’re gone. Maybe you have a house or condo with a mortgage that will need to be paid off. Or maybe you have young children that want to go to trade school or college one day. Or maybe you have a farm or a business, and you want to make sure everything continues as smoothly as possible in your absence.
You and your beneficiary’s needs may change over time – maybe you’ve paid off that mortgage, or you’ve gotten divorced, or your children are grown but you have grandkids on the way. When your life changes, you can change your beneficiary(ies) as well.
What are the different categories of beneficiaries?
When you’re designating your beneficiaries, you can name them as a primary beneficiary, a contingent beneficiary or a tertiary beneficiary.
The primary beneficiary is the first in line to receive the proceeds from your policy. If your primary beneficiary dies before you do or is unable to accept the proceeds, the contingent beneficiary is second in line. If neither your primary beneficiary nor your contingent beneficiary is still living or able to claim the proceeds, then the tertiary beneficiary would receive the proceeds instead.
You can name multiple beneficiaries as a primary, contingent or tertiary – for example, you can name your spouse as the primary beneficiary and all three of your children as the contingent beneficiaries. Or you could name all your children as the primary beneficiaries, your siblings as the contingent beneficiaries, and your favorite charity as the tertiary beneficiary.
How can I choose a beneficiary
While you could name anyone with an insurable interest as a beneficiary, you should give this some careful thought. Will your spouse need the funds to take care of your family after you’re gone? Are you setting up a trust to manage your assets? If you’re a small business owner, who will take over the company? Do you have a favorite charity that you’d like to give a final donation? All of these questions are important to consider when you choose a beneficiary for your life insurance policy.
How can I change a beneficiary?
You can change your beneficiary designation if things in your life change, such as getting married like I did, or getting divorced like my parents did, or setting up that trust like you’ve been meaning to.
Changing your beneficiary designation at Indiana Farm Bureau Insurance is easy – all you need to do is complete a form and provide some information about your beneficiaries or contact your local insurance agent. For example, if you just got married and are naming your spouse as the beneficiary, you’ll need to provide their full name, date of birth and Social Security number. If you are naming your revocable trust as your beneficiary, then you’ll need to provide the full legal name of the trust and a copy of the trust agreement.
Once your policy’s beneficiary designation has been updated, you’ll receive a confirmation notice. Be sure to attach this to your policy!
In addition, make sure your family knows where to find your insurance policies when they’re needed. We never did find where Dad hid his policies, but thankfully his financial advisor had all his policy information!
Naming beneficiaries for your life insurance policies and retirement accounts is crucial to ensure proceeds are distributed according to your wishes after you're gone. As your life circumstances change, it's important to regularly review and update your beneficiary designations.