How to name life insurance beneficiaries
Being in line for an inheritance is always something of a double edged sword. While you can be pleased to be in line for a significant financial boost in the future, it’s also dependent on someone you know and love passing away. It’s a tough pill to swallow, but in the end the inheritance will help to improve the life of the beneficiary and their dependents.
If you’re starting to think about choosing beneficiaries for your life insurance, here are some tips on how to be effective and avoid some of the common mistakes.
How to name a beneficiary
Knowing who you want to leave your life insurance benefit to is one thing, but putting that into the contract in a way that will ensure things play out the way you wanted is quite another. When naming your beneficiaries, make sure you:
- Know the basics: Understand that you can award your life insurance to one person, to several people, and in different amounts to each person. You can name your Estate as the beneficiary, your spouse, a charity or a trust.
- Be specific: You need to be specific, by naming every beneficiary individually. Leaving all the payout to one person, even if it’s a particularly financially savvy person, could end with the wrong people being awarded the wrong amounts.
- Assure they can inherit: Certain people cannot benefit, such as children under 18, so make sure the person is eligible before naming them.
- Think about tax consequences: Any inheritance is going to have tax ramifications for your beneficiary, so take advice on where the limits for taxes will be. Keep inheritance tax in mind too, as once your Estate is worth over £325,000, it could be liable for major taxation.
Putting your policy in trust can be useful for tax purposes, and can make it quicker and easier for your beneficiaries to get hold of the money after you pass. This can be immensely useful in terms of paying for the funeral, covering loss of income and coping generally while they wait for probate to take place. Ask your financial advisor for advice on writing your life insurance policy into trust.
What not to do
Naming beneficiaries is not always as straightforward as you’d like it to be, and if you get it wrong, you’re creating problems for those people you’ve left behind. Here are some of the big no-no’s when it comes to appointing beneficiaries for your life insurance:
- Naming a minor child: Your insurance company will not pay out to an underage child, and if you haven’t arranged a trust or legal agreement for someone else to manage the money, a guardian will be necessary. This can cost a great deal, so instead choose a trustworthy adult to look after the money until the child is 18.
- Making your beneficiary ineligible for benefits: Some levels of gifts or inheritance could stop certain benefits, which is not too much of a big deal for someone who just has an income top up, but if you have a loved one with a disability or special needs, you could be depriving them of life changing support. Instead, put the money in trust, with a trustee managing the money on their behalf.
- Assuming your will takes precedence: No matter what your Will says, what was written into the life insurance policy carries more weight. The policy is a contract, so if your beneficiary changes, you will need to notify your insurance company. Changing it in your Will is not enough.
- Forgetting to update it: Situations change, people change, and so too should your life insurance policy. Ideally, you should review all your finances on an annual basis, but at a minimum make sure things are still correct after every major life event; births, deaths, divorces etc.
Taking out a life insurance policy is a great way to help provide for your loved ones after you’re gone, but it needs to be handled in the right way to ensure they can benefit from your investment. Get specific advice on naming your beneficiaries so that, when the time comes to pay out on the policy, it is a true benefit to them and not an additional problem. Sign up to Lexikin and talk to our professional insurance advisers.
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