If you are the breadwinner in your family, even if you earn very little, it is a very good idea to take out a life insurance policy and choose a life cover beneficiary. If you pass away, your loved ones will have the financial support that they need. When you take out a life insurance policy, you need to name your beneficiary - the person who receives your life insurance benefit in the event of your death.
It’s really important that you name a beneficiary. If you don’t have a specific beneficiary, the money paid out from your insurance will be paid into your estate, which is the total of all your property and debts. There are two problems with this. Firstly, the money in the estate won’t be available to your family immediately – in fact, it can take a year or even more for the legal process to be finalised. Secondly, once the insurance pay-out is in the estate, anyone you owe money to can claim against it.
Your family will have immediate access to a lump sum cash pay-out
Now consider the situation if you have a beneficiary. Firstly, the pay-out will be made the moment the claim is approved, which means that your family will have immediate access to a lump sum cash pay-out. Secondly, because the beneficiary receives the life insurance directly, bypassing your estate, the money is theirs, and your creditors don’t have a claim on it.
Who to choose as your beneficiary?
Now you know why it’s so important to name a beneficiary, but who do you choose? For many people, this decision is straightforward – usually, they choose their spouse or an adult child. If you have younger children, you’ll have to give this some more thought. A minor child cannot be a beneficiary on your life insurance, they will need someone to manage the money for them.
You will have to write a will stating who this “guardian” should be. It is very important that you choose someone trustworthy and responsible - and someone who is likely to carry out your wishes and take care of your children. And remember that it’s better to choose a reliable friend than an untrustworthy family member. Be honest with yourself about who would really do the right thing once you are gone.
4 things you need to know about life cover beneficiaries
1. You can change your beneficiary
If you have a life insurance policy, you can change your beneficiary at any time. People often change their beneficiaries when their life circumstances change – for example, if they get a divorce, or if their children have reached adulthood. Review your policy every few years to make sure that your list of beneficiaries is still relevant and that you are sufficiently insured.
2. You can name more than one
You are able to name more than one beneficiary of your life insurance and can stipulate the portion of the benefit that each beneficiary receives. For example, if you have two adult children, you might make them both beneficiaries and stipulate that they each receive half of the benefit.
3. What happens if your beneficiary dies before you?
Call your insurance provider to name a new beneficiary.
4. What happens if your beneficiary dies at the same time as you?
Your benefit will be paid into your estate.
Hard conversations and tough decisions Thinking about these things can be hard, and talking about them with your loved ones is even harder, but it is vital that you have these conversations and write up a will so that you can be sure that your family will be looked after financially once you are gone. It’s no good sticking your head in the sand - you will have great peace of mind once you have made the tough decisions.