One of the peripheral advantages of life insurance is the ability of the policy owner to transfer the death benefits (or make provisions to do so) of the policy. Designating beneficiaries is a critical benefit that precludes the need for protracted will probate. Formally, the provision is called the “beneficiary provision.” Life insurance makes this process far more uncomplicated, but policy owners should be aware of the implications of assigning beneficiaries in order to make use of this facility.
• Primary beneficiary
The policy owner must name a recipient of the death benefits when filling out the life insurance application. By default, if no beneficiary is named or designated, the proceeds of the policy will pass on to the insured’s estate, where it would be subject to a will probate or estate distribution by the courts. However, the policy owner can specify an individual (or individuals) or entity as the beneficiary. The beneficiary who will receive the death benefit when the insured dies is the primary beneficiary. A person can name one or more beneficiaries on the application form.
• Secondary/contingent beneficiary
It is possible for the primary beneficiary to pass away before the insured does. In that case, a secondary beneficiary is named. This beneficiary only becomes entitled if the primary beneficiary passes on before the insured. In any other event, the secondary beneficiary has no liens on the death benefits.
A critical issue in naming beneficiaries is the issue of revocability. Revocability refers to the power of the policy owner to change the beneficiaries or life policy provisions without the consent of the beneficiary. Where a beneficiary is revocable, the policy owner (not the insured) must give notice to the insurance company in writing, or by resubmitting a beneficiary form. In cases where a beneficiary is revocable, it is either through law (such as a spouse or child) or by the policy owner naming the designated beneficiary as an irrevocable one. The policy owner cannot reassign the policy or obtain loans from it without written consent of the irrevocable beneficiary.
According to riscario.com, irrevocable designations are necessary for the following reasons:
* Compliance with a family court order
* Compliance with a separation agreement
* Creditor protection when the beneficiary is not in the protected class
Even with the irrevocable designation, the policy owner is allowed to lapse the policy, receive dividends, utilize automatic premium payments, and change the policy to a paid-up plan.
Life insurance can be used to create trusts as well. These trusts can be charitable trusts or those for beneficiaries who are below the legal age. If you are naming a minor as a beneficiary, it is necessary to create a trustee who would manage the fund until the minor attains the legal age.
Designating beneficiaries facilitates estate transfer, which is a critical advantage of life insurance. When naming those who would receive the insured’s death benefits, it is important to consider whether the beneficiary should be revocable or irrevocable. Once beneficiaries are revocable, the policy owner can add, change or remove beneficiaries at will, once the insurer is given appropriate notice. This beneficiary provision significantly increases the utility of life insurance as financial protection and part of an estate plan.