How To Change Your Life Insurance Beneficiary And Why You Should
Times have started to shift as the internet has empowered you to research and decide what you need for life insurance.
This process is excellent and makes purchasing life insurance much easier, but you will want to make sure that you are correctly outlining your beneficiaries when you buy your policy.
In this article, we will review the steps on how correctly choose and also change the beneficiary on your life insurance policy. We will also review WHY this is such an essential item to address and not overlook.
How to Change the Beneficiary on your Life Insurance?
Step 1: Annual Review
For years life insurance has been sold in person by an insurance sales agent or a financial advisor who has some personal connection to you.
If your agents are doing their job, they would reach out and check in at least once a year to see how you are doing and complete an annual review.
This annual review should cover several items, and reviewing your beneficiary designation should an important one.
If you do not have an agent who is reaching out on an annual basis, make sure you take the initiative and review your policy’s beneficiaries annually.
You can check your beneficiaries in a few ways.
- You can call your life insurance company directly. The number to call will be listed on your billing statement you receive each month.
- You can see if your insurance carrier has an online portal. You can set up a login and password and manage your insurance policy on your computer.
- Call the advisor assigned to your policy. All policies will have a “servicing” advisor assigned to your account. This may not be the person who sold you the plan, but they will most commonly have the ability to answer your questions.
If you are having a hard time finding the information, you can also Check your companies website, and you should be able to connect with someone who can help you.
Check out the full list of insurance carriers: Life Insurance Directory
Step 2: What Has Changed?
During your annual review, you will want to consider: What has changed?
Life gets the best of us, and we can become so busy that we forget how quickly things can change in our lives.
If I were to take a guess, I am sure that your life insurance policy is not something you think about daily.
I guess that you have not thought about your life insurance policy since the day you purchased it. Don’t worry; you’re not alone!
You do not need to become overly concerned with your insurance policy, nor do you need to become a life insurance expert BUT, you do want to keep an eye on your plans.
The reason why is that a simple name change to your policy’s beneficiaries can drastically change the outcome you had planned for when you purchased your policy.
Top items to consider when reviewing: What has changed?
- Were you recently married?
- Did you have a name change?
- Did you just have a new child?
- Was there a death in the family?
- Were you recently divorced?
- Did you recently receive an inheritance?
There are just a few common questions to ask yourself as you review your policy. Each one of these scenarios will dictate differently how you should be changing your beneficiaries. If you have had any of these items change in your life, you will want to review your beneficiaries.
Step 3: Tax-Free Benefit?
Life insurance is designed to ideally provide a tax-free benefit to the beneficiary of your policy.
BUT, are you sure this will happen?
To ensure this happens, you will want to take into consideration “What Has Changed” each year and update your beneficiary designation properly. (If you are unsure what to do make sure to consult an advisor.)
Here is an example we have run into before:
If you are married and just had a new baby it is very important to review your beneficiary. Unfortunately, many new parents are so busy taking care of their new baby that they forget to review their life insurance policy. This is assuming that the new parents have life insurance.
If you are a new parent and do not have life insurance make sure to get some right away now. You can get a quote here.
Let’s assume the above couple did have life insurance. Before the baby was born, they selected their spouse as the primary beneficiary, and that was it. Let’s follow this example and see what they should do.
John is married to Marry.
They both have a 1,000,000 life insurance policy.
- John is listing Marry as his primary beneficiary for his policy.
- Marry listing John as her primary beneficiary for her policy.
In this scenario, if John OR Marry were to pass away unexpectedly, the surviving spouse would receive the $1,000,000 death benefit tax-free.
Check out: Whole Life Insurance 1,000,000 Cost
After the Baby:
Now that John and Marry have had a baby, they will need to consider and review their beneficiary arrangement in case they both were to pass away at the same time. Although this is an unfortunate scenario to think about, it is a reality to plan for.
If John and Marry never change their beneficiaries, this can lead to one outcome. But if John and Marry take the time to change their policy and add the new baby as their second beneficiary, this can lead to an alternative outcome.
Which option is better?
Both options would not be advised to do. Here is why:
- If John and Marry never add a secondary beneficiary, they are risking exposure if they both were to pass away at the same time. In this scenario, John and Marry’s death benefit will not transfer to anyone tax-free. It will default to their estate and then will pass through probate risking additional tax exposure.
- If John and Marry were to add the new baby as their secondary beneficiary, unfortunately, this also not be a great solution.
- The reason why is that children under the age of 18 cannot receive a death benefit from a life insurance policy. If the secondary beneficiary is a minor, the death benefit would be held until the minor is of age.
The Potential Solution:
A stronger solution to the two above scenarios is to make sure that you always have a secondary beneficiary on your policy, and if you do have minor children that are the ones intended to be your beneficiaries. Set up a trust for minors to allow your death benefit to be received and distributed by a designated guardian that you choose.
If you are not sure what the best beneficiary designation will be for your situation, we would advise you to speak to your insurance/financial advisor or your tax planner to make sure you are making the best beneficiary designations.
Step 4: Beneficiary Change Form
Filling out a new beneficiary form can be somewhat confusing. Don’t be stressed when reviewing these documents. Below is an example of a standard beneficiary form. Many of these forms will be similar, so this will be a great help to anyone looking to make a change.
Let review how to change the beneficiary on your life insurance. We will walk through this form stem by step. We will continue to use John and Marry’s example to help us illustrate how to fill out your beneficiary forms
Starting at the top of the page, you will see the section 1a.
You will want to start by selecting a primary beneficiary first, and you will select “primary” in the class section of 1a.
- Named Individual
- Trust under Insured’s Will
- Estate of Insured
- Other Entity
Depending on who you are planning on designating as your primary beneficiary will dictate this section.
For example, if John from the scenario above picks his wife Marry as the primary beneficiaries, then John would select “Named Individual” as the type. If John and Marry decided in the future to create a trust, then they would use this as the designation type.
Class of Children:
This section may not be something that is on every beneficiary form. Each form may have slight differences and options depending on what company you are working with. For this form, the company is giving the owner of the policy a pre-selected option for children as a designation.
Since we are currently designating Marry as the “Primary” beneficiary in section 1a, we will not check any of these boxes.
You will now fill out all the necessary personal information and mailing address. This will be very important to have correct and update. If an insured were to die, the information listed on the policies beneficiary documents would be the only way the insurance company or agent can contact the beneficiary.
As a part of this section, you will have the opportunity to designate “Distribution” amounts. This is done as a percentage of the death benefit or as a cash amount. For example, John can list that he wants 100% of the benefit to go to Marry, or he can list that he wants $1,000,000 to go to her. The distribution section is most important when there is more than one beneficiary.
Section 1b is a replica of section 1a. In this section, you will want to designate a secondary beneficiary. You will do this by selecting “secondary” in the type section. If you are listing an adult, then you will then follow the same instructions we reviewed above for section 1a. If you are listing a minor, then you will want to make sure to do so correctly.
Designating a Minor as your secondary or third beneficiary:
In John and Marry’s scenario, they just had a new baby. They want to add the baby as the secondary beneficiary. Adding the baby as a secondary is fine; however, they will want to ensure that they set up a UTMA/UGMA.
This is a trust account to accept a death benefit payout since the beneficiary is a minor. When setting your UTMA/UGMA up, you will designate a custodian of the account.
We understand it is not a pleasant thing to think about; however, it is best to be prepared. To ease your stress when you think about this, remember that this type of beneficiary designation would be needed if both parents were to pass at the same time. The chances of this are very low, but they are a possibility that you will want to plan for.
So in John and Marry’s scenario, they will want to select a UTMA/UGMA list their child and a custodian as the secondary beneficiary of both their policies.
The last item you will need to do is sign the documents as the owner of the policy and send in the information to your insurance company or agent who is servicing your policy. Once the beneficiary change form has been received, the changes should be reflected in approximately ten business days.
Step 5: Confirm changes have been made
Now that you completed your beneficiary changes and submitted them to your insurance provider. Remember to check and confirm that the information has been updated and is listed as you intended.
This is a step that many misses. In a perfect world, there would never be any issues when updating forms like this. Unfortunately, this is not the case. Your updates are manually adjusted “by a human.” So, mistakes happen in our experience that happens ALOT.
Make sure to confirm your changes personally:
Here is a real-world example as to why:
This past year we acquired a new client, and during our first review with her, we asked her if all of her beneficiaries were up to date. She explained that she had no idea! We pulled up her policies and reviewed only to find out that her ex-husband of 10 years was still listed as her primary beneficiary! She was astonished and terrified to think that her death benefit would have gone to this ex who she wants nothing to do with and not her kids.
We promptly made the adjustments, and everything worked out just fine. However, imagine if this woman had passed away before meeting us and reviewing her beneficiary’s? Her kids would have been deprived of the death benefit that was intended for them—all due to an update that was not recorded on her beneficiary form.
After review of this article, you should have a good understanding of how to change the beneficiary on your life insurance. We covered several important reasons why you would want to consider checking on your policies on an annual basis. We also head about some real-life scenarios where neglecting to review and confirm beneficiary changes could have led to a substantial loss of inheritance.
Take the time going into this new year and review your beneficiary designation. You may find that it is also time to reprice or replace your current insurance policy.
You can see what your 2019 whole life insurance rate would be right here below!