Being a national life insurance broker for multiple life insurance companies, I speak to a lot of different folks every day. The average person that I speak to usually has a lot of questions when it comes to purchasing life insurance. One common question is to define beneficiary. Which seems easy but ultimately, there is a lot more to it than just a definition. Let’s look at how to define beneficiary in more depth.
The dictionary defines beneficiary as a person who receives benefits, profits or advantages. Very simply put your beneficiary is the person you want to receive the proceeds or money of your life insurance policy when you die. The first beneficiary is called the primary beneficiary. This person, business or institution is first in line to receive benefits. This can be one person or several. It can be an institution like a bank to repay a loan or a business to allow funds to cover the loss of a business partner or key employee. The key to leaving money to more than one person is to remember almost all life insurance companies use percentages and it must equal 100%. For example, you have three children to leave money in equal shares. This means the percentages would be 33.333% which is not allowed by life insurance companies. You must leave one child 34% and the other two 33% in order to equal the required 100%. There is practically no limit to how many primary beneficiaries you may have. The most common is a spouse which is usually left 100%.
You should be cautious of making your estate as your beneficiary. One of the awesome benefits of life insurance proceeds, is that the proceeds pass directly to the named beneficiary. These funds are tax free and can be readily accessed in a short period of time. Leaving life insurance proceeds to an estate can lead to long delays and taxation. If the funds go to the estate, then they must pass through probate and can be subject to estate taxes. Be careful planning your beneficiary.
The next level of beneficiary is the contingent beneficiary. The contingent beneficiary is used if the primary beneficiary dies before or with the insured. An example of using a contingent beneficiary would be if family man had left his wife as the primary beneficiary at 100% and they were both killed in an automobile accident together. There would be a need for a contingent beneficiary. The most common contingent beneficiary is children.
The last level of beneficiary is the tertiary beneficiary. The tertiary beneficiary is used if both primary and contingent beneficiary were to die before or with the insured. I will say that having a tertiary beneficiary is not commonly used like a contingent beneficiary. An example of a tertiary beneficiary would be necessary would be if an entire family were to perish in an accident such as a plane crash or house fire.
Once you have your life insurance in place, your next purchase should be a will. Today, there are online websites that allow you to purchase a will from the comfort of your living room couch. The three main documents most working Americans will need is their last will and testament, a living will and a power of attorney. Don’t over pay for documents meant for the wealthy people unless you have a lot of assets. Your loved ones deserve that much form you, don’t they?
“Procrastination is the bad habit of putting off until the day after tomorrow what should have been done the day before yesterday.”—Napoleon Hill
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Tim Wilhoit is owner/principal of Your Friend 4 Life Insurance Agency in Nashville, TN. He is a family man, father of 3, entrepreneur, insurance agent, life insurance broker, salesman, sales trainer, recruiter, public speaker, blogger, author and team leader with over 28 years of experience in sales and marketing in the insurance and beverage industries.