One of the most important steps in setting up your life insurance policy is listing beneficiaries — the individual(s)/entity(ies) to whom you leave your policy’s proceeds.
You’re only required to name one, but how many beneficiaries can you have? Usually, as many as you want, but check your policy documents to ensure there are no exceptions in the fine print.
Why List More Than One Beneficiary?
Typically, your life insurance beneficiaries are the reason to get coverage in the first place. People have countless personal reasons to name multiple beneficiaries.
While you only need to have one beneficiary, we recommend multiple.
If the entire death benefit goes to one person and they have already passed away or are otherwise unable to accept it, the proceeds revert back into your estate and may go through called probate, where the court decides how the funds are distributed.
There are two aspects of beneficiary designation:
- You can list a primary beneficiary who will receive 100% of the proceeds and then name a secondary (or contingent) beneficiary to receive 100% of the proceeds in case your primary can’t accept benefits for any reason.
- You can elect to have multiple beneficiaries split the proceeds. Percentages received don’t have to be the same; you just need to ensure 100% of the benefits are accounted for.
Of course, you can also deploy a mix of these strategies. No matter how you designate beneficiaries, doing it correctly is critical to ensure they receive benefits.
Primary, Secondary & Tertiary Beneficiaries
The most straight forward way to designate beneficiaries is to have 100% of your death benefit go to one primary beneficiary. However, if you want all the proceeds to go to one person or entity, you should really name secondary (or contingent) and tertiary beneficiaries.
Secondary: The beneficiary listed is second in line for the payout if your primary beneficiary is unable to receive it.
He also names his brother as secondary beneficiary in case he and his wife die at the same time.
Tertiary: This beneficiary is the back-up if both the primary and secondary beneficiaries are unable to receive the death benefit.
He also names his brother as secondary beneficiary in case he and his wife die at the same time. John lists his local animal shelter as a tertiary beneficiary should both his wife and brother be unable to receive the death benefit.
While you’re only required to name a primary beneficiary, it’s always a good idea to name at least a secondary beneficiary just in case your primary dies before you do.
How to Split Proceeds Between Multiple Beneficiaries
When it comes to naming beneficiaries you may assign proceeds to be distributed per stirpes or per capita.
- Per stirpes means that proceeds are divided by rank in the family
- Per capita means that proceeds are divided by the number of people
These distribution options help the claims process if any beneficiary were to die before the policyowner.
Of the two options, per stirpes is more common.
If you have a fairly large estate, be sure to work with an estate planner to ensure that you avoid any unnecessary estate taxes.
Review your term life insurance policy annually as life events occur, including:
Taking the time for a policy review is the best way to ensure what happens upon your death is exactly what you wish.
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