Life insurance can be tailored to fit a wide array of financial needs, but the ultimate goal for most people is simple: passing along a death benefit to selected beneficiaries in the event of the insured’s death. While this goal may be straightforward, designating beneficiaries and ensuring that the policy pays according to an insured’s wishes is not a step to take lightly. Taking time to understand and carefully designate beneficiaries can help avoid any lack of clarity or extended delay at the time of death.
Understanding beneficiary designations
Employees can name any person or entity (except their own employer) as a beneficiary, including family members, friends, trusts or charities. Beneficiary designations fall into two categories:
- Primary beneficiaries: The first person or entity insureds choose to receive life insurance benefits.
- Contingent (or secondary) beneficiaries: The person or entity insureds choose to receive benefits if no primary beneficiaries are qualified or alive at the time the insured dies.
Additional beneficiary designations include:
- Minor beneficiaries: Unless specific steps are taken, most states require that a court appoint a guardian to administer life insurance proceeds payable to a minor child.
- Trusts: Insureds may elect to designate trusts as beneficiaries. Benefits will be released to the trustee for distribution according to the trust’s guidelines when the exact name of the trust, along with accompanying Tax ID number, is listed as the beneficiary.
- Estates: When an estate is named as beneficiary, the insurer will release benefits to the court-appointed representative of the estate, such as an executor or administrator.
- Absolute assignments: An “absolute assignment” transfers all rights, title and interest of a life insurance policy from the insured to an assigned individual or entity.
Without proper beneficiary designations, an employee’s death benefit can sometimes be left to chance. Have your clients use the following guidelines to help employees make clear and accurate designations.
- Review beneficiary designations with employees as they are completed. Make sure that designations are complete, and that forms are signed, dated and percentages add up to 100%.
- Request dates of birth and addresses for beneficiaries. An accurate account record including this information as well as, relationship to insured, addresses and even Social Security numbers can speed up processing and avoid escheatment of funds to the state.
- Confirm beneficiaries annually. During open enrollment or other designated periods, remind employees to review and update their beneficiaries.
- Retain records of the original designation and any changes made by the employee, and encourage employees to keep a copy for their record. Maintenance of the beneficiary designation record is the responsibility of the group policyholder.
If there are inaccuracies in beneficiary designations, or in the absence of one, insurers may rely on affidavits from family members in order to avoid a court action.
For more information about maintaining proper beneficiary designations, read our Inside Track educational paper.