Probably the most important reason you choose to purchase life insurance is to protect your family financially in the event of your death. To that end, it is critical that you have established the correct beneficiary designation. A beneficiary of a life insurance policy is the recipient of the proceeds of the policy when the insured dies. The owner of the policy designates the beneficiary. The most important consideration is to make sure that the owner's wishes are fulfilled upon the insured?s death and that legal complications are avoided.
Beneficiary designations typically offer two categories; primary and contingent. The primary beneficiary is the one who will receive the proceeds upon the insured's death provided they have outlived the insured. If the primary beneficiary predeceases the insured, then the proceeds will be paid to the contingent beneficiary. It is a good idea many times to stipulate contingent beneficiaries in case the primary does not outlive the insured.
A beneficiary can be an individual, by name, or a group of individuals, such as the 'children of the insured.' When designating a group of individuals, it is important to recognize that complications may occur. For instance, does the designation include adopted children, or children from a former spouse? You will need to clarify whom you wish to include. Also, if your children are minors, many states require insurers to pay a legal guardian as opposed to a minor.
Another situation that may become complicated is when proceeds are left to multiple people, such as an insured's children or grandchildren. For example, Joan owns a life insurance policy on herself and has planned for the proceeds of her policy to be paid to her children (Meg, Jill and Harold) or her grandchildren. However, Meg and Jill die before their mother. Meg leaves four children but Jill has none. How will the proceeds of the policy be distributed when Joan eventually dies?
Per stirpes and per capita are terms that describe methods of distributing property to family members and heirs. Per stirpes means 'branches of the family,' and per capital means 'by heads.' In the example above, under a per stirpes distribution, Harold (one branch) would receive one-half the proceeds and Meg?s surviving children (the other branch) would divide the remaining half among themselves. Under a per capita distribution, Meg's four children, along with Harold, would each receive one-fifth of the proceeds. Additionally, there may be complications if any of Meg's children are still minors when Joan dies.
Using the example above, you can see how complex beneficiary designations can become. Please consider all the implications before making your designations.