One of the most important steps you can take whether you are single, married or a parent is purchasing of life insurance. Dying is not something we want to think about, but it is inevitable and sometimes comes as a sudden and unpredictable moment.
Life insurance provides funding to those you leave behind. It eases their financial struggle without your income and can pay your funeral expenses.
One of the most important considerations when you purchase a policy, is naming your life insurance beneficiary. This is something that requires serious consideration. Read on to learn how to determine the best person to be your life insurance beneficiary.
What is a Life Insurance Beneficiary?
The beneficiary you name on your life insurance policy is the person(s) who will receive the payout upon your death. Life insurance beneficiaries are either primary or secondary (contingent). If upon your death, the primary beneficiary is no longer alive then the disbursement goes to the secondary beneficiaries.
It is possible to name more than one person as a primary or secondary beneficiary. When you do this the beneficiaries you list will each receive an equal portion of the payout. If the primary beneficiary is available to take the payout, the secondary beneficiary receives nothing.
Deciding Who To Name as Your Beneficiary
Each person must consider their own personal circumstances when deciding who to name as their primary and secondary beneficiaries. Many people who are young and single will list their parents as their beneficiary. This provides their parents with the funding needed to pay for a funeral and any outstanding debt if they were to die an untimely death.
When married or in a permanent relationship, that person is usually the named beneficiary. This provides financial assistance to the person left behind.
Elderly parents who no longer have a surviving spouse often designate their adult children as joint beneficiaries to receive their life insurance pay-outs. That provides their children with the funds necessary to pay funeral expenses if there are no other funds in the estate.
The older you get, the greater number of responsibilities you have that increase the number of things to consider. Let’s take a closer look at some possible scenarios.
Married with No Children
In this instance, the usual beneficiary designation is the spouse. The normal person listed as a secondary beneficiary when there are no children is your parents. If your parents are no longer living, you may want to designate a sibling or their children.
If you have a substantial amount of holdings you may want to designate a favorite organization or charity to receive a portion of your life insurance.
Married With Children
As noted above, it is common for a married person to name their spouse as their primary beneficiary. This allows that person to provide for the children, plus the mortgage, and utility bills.
The primary breadwinner in the home may have a substantial life insurance policy to cover these expenses. Even if one spouse earns considerably less or is a stay-at-home parent, they are contributing valuable services to the family.
If that spouse were to die, what would it cost to cover childcare, housekeeping, laundry, yard maintenance, and more? In Canada, the average housekeeper salary is $16.08 per hour.
You must consider the value of each spouse to the running of the household. This helps determine what size policy to purchase and who to list as beneficiaries.
As a single parent, you may be purchasing a life insurance policy to help pay for your child’s support should something happen to you before they are grown. Life insurance companies are unable to pay funds out to a minor. The funds will instead be payable to the child’s custodian for handling until the child becomes an adult.
It is possible that the life insurance company will require the name of a designated custodian on the beneficiary form. An alternative is to name a trust as the beneficiary. The trustee will manage the trust funds until your child reaches 18 or an age you choose for them to receive payment.
Account of the Superior Court of Justice
Money may be payable to a child under the age of 18 in an estate or under a life insurance policy naming the child as the beneficiary. If no adult has legal authorization to receive monies for the child, the money must go to the Account of the Superior Court of Justice in Toronto.
The Insurance Act § 220 or 271 makes it the obligation of the insurance company to file an affidavit and pay the insurance funds into the court to the Accountant. If there is an estate or trust, § 36(6) of the Trustee Act requires the executor, trustee, or administrator to file an affidavit and pay the money into court to the Accountant.
The benefit to this arrangement is that the funds on deposit with the Accountant earn interest that is calculated daily and compounded monthly. There is also a possibility that a portion of the funds may be invested in a Diversified Trust Fund.
The child may receive their funds and interest upon reaching the age of 18 or at a later date designated in the will or other court document. If funds are necessary to provide for the care of the child, the person who has care of the child may write to the Office of the Children’s Lawyer and a judge will decide if there will be any disbursements.
Selecting a Secondary or Contingent Beneficiary
The secondary (contingent) beneficiary is the person who will receive the payout on your life insurance policy if the primary is no longer available. You must select this person with the same degree of care as the primary.
Let's assume you and your spouse both die in a car accident. If your minor children are listed as secondary beneficiaries, the funds will go to whoever becomes their guardian.
The alternative is to list the person you desire to become the guardian of your children as the beneficiary. The downfall to this is that if they decline the guardianship of the children, they will still receive the payout on your life insurance. There is much conversation surrounding this topic. For a more detailed explanation, we recommend reaching out to an experienced life insurance advisor to discuss this at greater lengths.
When a Trust is Beneficiary
When you designate your trust to be the beneficiary of your life insurance policy, you gain a bit more control over how the money is distributed. The trustee of your estate will have a fiduciary duty to follow the law regarding the administration of the trust. This provides an extra layer of protection, making sure funds are used the way you intend.
You may designate in the trust that your child's guardian receives a specific amount of funds each year to provide for your child’s care. You may also designate specific amounts to provide your child with a car, pay college tuition, etc. You also control at what age they receive the balance of trust funds.
Avoid These Mistakes
Let people know they are your beneficiaries. Advise them the company you purchased the policy from and what the contract number is. This allows them to contact the insurance company to receive the payout following your death.
This discussion also allows you to make sure you have the correct information the insurance company will need, including their date of birth, address, and social insurance number. Verify every year that your contact information and that of your beneficiaries are current. Make any necessary changes to the beneficiaries promptly.
Your life insurance policy is a contract under the law. The terms on the policy are how funds will be distributed upon your death. This contract trumps the terms of a will or trust.
If you divorce and then remarry, you may have a new will and trust that designates your second husband as the sole beneficiary of your assets. If you forgot to remove your ex-husband as the primary beneficiary on your life insurance and you die, your ex-husband will receive the payout.
Providers of life insurance have an obligation to pay beneficiaries named on the policy. In the event all of your beneficiaries precede you in death, the proceeds of your policy will normally be paid to your estate. If only your primary beneficiary precedes you in death, then payment will be made to your secondary beneficiaries.
How to File a Claim
Filing a claim and receiving the pay-out can take anywhere from a few days to a few weeks. The insurance company will need to verify the person’s death before making payment. The steps are relatively simple to complete:
Gather Documents necessary to file the claim. This includes the policy information and the death certificate.
Contact The Insurer by telephone or email to begin the process. The insurance company will send over claim forms and a list of documents they require.
Complete and file the claim form and check any information the insurance company has pre-filled in for you.
Wait for the claim to process, which may take a few weeks, depending on the circumstances of the death and if the company needs additional documents.
Receive payment following approval of the claim.
The main purpose of purchasing life insurance is to provide for your loved ones financially. You must consider all factors when selecting your life insurance beneficiary. After making that selection make sure all information is kept up-to-date.
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