Choosing a beneficiary is an important aspect of your life insurance policy. In the event you pass away, your designated beneficiary will receive the benefits of the policy. Taking out a life insurance policy protects your loved ones from debts resulting from funeral expenses, mortgage payments, and the initial shock of going from two breadwinners to one breadwinner.
It helps them remain on their feet without going into debt. It has become a necessity for Canadians to obtain a life insurance policy, such as term life, whole life, or universal life insurance, mortgage insurance, no medical exam insurance, and funeral insurance in Canada. Before you take out any type of life insurance policy, you need to choose a beneficiary.
How Important is It Choose a Beneficiary?
The beneficiary will receive the payout from your life insurance policy. You can only change the beneficiary in your lifetime, but once you are gone, no one can change or correct the beneficiary. Therefore, it is crucial that you give it some thought and then choose a person who will receive the payout.
What is a Beneficiary?
A beneficiary is a person that receives the death benefit from your life insurance policy after your death. You need to familiarize yourself with two types of beneficiaries, primary and contingent.
- Primary Beneficiary – They are the first in line to receive the payout from your life insurance coverage. Primary beneficiaries include your partner, children, or other relatives.
- Contingent Beneficiary – They are second in line to receive the payout from your life insurance coverage in the event the primary beneficiary passes away. If all the primary beneficiaries have passed away, the contingent beneficiary receives the payout.
What Happens If You Do Not Choose a Beneficiary?
Most people take out a life insurance policy so they can ensure their loved ones are taken care of after their death. If you do not name a beneficiary, your insurance company will follow a specific order, starting with your partner, children, parents, and estate.
If your insurance policy does not have an order of who gets the payout, the payout may be given to your estate or held in probate. Probate means that your payout will not be given to anyone until an administrator appointed by the court can figure out your financial situation. However, that process can take months to years to complete.
For this reason, choosing a beneficiary from the start is important and requires careful thought. If you have taken out any other life insurance policies such as funeral insurance Canada, you will have to name a beneficiary for that as well.
6 Tips to Choose a Beneficiary for Your Life Insurance Policy
Following these tips to choose a beneficiary for your life insurance policy:
1. The Purpose of the Life Insurance Policy
Answer the question, “Why are you taking out the life insurance policy?” Some reasons people take out life insurance policy include providing financially for their family or keeping their business going after their passing.
2. Understand Your Options
Instead of choosing your partner or children as beneficiaries of the policy, you have other options you can consider. Your options include:
- One person
- Two or people (You can decide how you want to split the payout between them)
- The trustee of a trust you have created
- A non-profit organization or charity
- Your estate
3. Have a Secondary Beneficiary
You need to have a secondary beneficiary for the following reasons:
- Your insurance company cannot locate your primary beneficiary
- Your primary beneficiary is deceased
- Your primary beneficiary refuses the payout
4. Update Your Life Insurance Policy from Time to Time
One of the most common mistakes people make is forgetting or neglecting to update their life insurance policy. For instance, you took out a life insurance policy when you were single and named your parents as the primary beneficiary.
Later, you got married and did not update your life insurance coverage to name your partner and children as the primary beneficiaries. If you pass away, your mother, not your partner and children, will get the benefit. Do update your life insurance policy with every milestone you accomplish in your life such as marriage and having children.
5. Be Specific
The specifics matter greatly in a life insurance policy. You need to be as specific as possible. For instance, you name your children as the primary beneficiaries. If one of them dies before you pass away, do you want your other child to receive the entire payout or do you want it to split between your living child and the deceased child’s heirs.
6. Do Not Choose a Minor
Instead of choosing a minor to receive the benefits of the life insurance policy, establish a trust fund for them or designate a person you trust to ensure your child receives the payout. If you choose a minor, the court will appoint a guardian to oversee the funds. Not only will this be a lengthy process, but it will require several court hearings.
If you fail to update your life insurance policy with the latest beneficiaries or make a mistake documenting them, the wrong person may receive the payout. Therefore, you need to carefully designate the beneficiary, updating them after a divorce, remarriage, children, death of a loved one, and so on.
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