2. Your Beneficiaries

We buy life insurance to remove the risk of our premature death to those financially dependent on us. They are the ones who benefit from the insurance.

 

So how exactly does the insurance contract make this happen?

 

When you apply, you designate who your beneficiaries are – that is, who would receive the money.

 

Splitting the Payout

You can add multiple beneficiaries and in whatever allocation to fit your needs. 50% can go to one sibling and 50% to another. Or 80% to your spouse and 10% to each of your parents.

 

Primary Beneficiaries

For most couples, the spouse would receive 100% of the insurance payout as the primary beneficiary. But as stated, you can allocate this to fit your needs.

 

Contingent Beneficiaries

If a primary beneficiary dies before you and cannot receive the payout if you were to die, whomever you’ve listed as contingent beneficiaries would receive the payout. They are “contingent” because their benefit is contingent on the primary beneficiaries passing away first.

 

Typically, these are used to provide for children if the spouse as primary beneficiary passes away. So, the spouse would be 100% primary beneficiary. But if the spouse dies, then each of the children would be listed equally as beneficiary (e.g. 50% to child one, 50% to child two).

 

Do You Have Minor Children?

Children who are minors cannot directly receive insurance money. Imagine a 7-year-old receiving $500,000 after losing both parents. That’s a lot of candy and toys they could buy.

 

Instead, you should name a trusted adult as the beneficiary or establish a trust for your children.  A trusted adult, likely the one who would become guardian of the children if parents passed away, can be entrusted with providing care to the children with the help of the insurance money until they are adults. If you go this path, it’s important that your wishes are recorded in writing.

 

Or, if you designate a trustee for minor children in your life insurance application, upon your death a trust will automatically be established for minor children. The trustee of that trust would be tasked with disbursing money to the children.

 

Once the children become adults, the application should be updated as they can now directly be named as primary or contingent beneficiaries.