How to Choose Beneficiaries for Your Life Insurance Policy?

People buy Life Insurance policies to secure their family’s and other dependent’s financial future in the event of their untimely death. However, the policy benefits can be useless to the family if the policyholder doesn’t appoint the correct insurance beneficiaries.

If you want your family to live comfortably and meet all financial needs smoothly in case of the unfortunate event of your demise, then you must choose beneficiaries and add them to your policy when you purchase the plan. This Life Insurance guide covers more about beneficiaries, so your family doesn’t struggle with claiming the policy’s death benefits.

Understanding Beneficiaries

Before you proceed with naming beneficiaries in your policy, first understand who is eligible to become one. While most people choose individuals like their spouse, children, dependent parents, or other family members as insurance beneficiaries, some also choose a trust, business partner, or other entities.

A Life Insurance policy beneficiary is legally entitled to receive the sum assured if a policyholder dies during the policy tenure. Before assigning beneficiary rights to anyone, remember that the beneficiaries in Life Insurance are of primarily two types:

• Primary Life Insurance Beneficiary

A primary beneficiary is an individual who is legally entitled to receive the policy proceeds in the unfortunate event of a policyholder’s death. However, no proceeds can be claimed in his name if the primary beneficiary dies before the policyholder.

• Secondary Life Insurance Beneficiary

Also known as a contingent Life Insurance beneficiary, a secondary beneficiary refers to the individual who can claim policy proceeds if the primary beneficiary dies. There is a catch with contingent beneficiaries. They can only receive the beneficiary rights if the primary beneficiary dies before the policyholder.

Factors to Consider When Choosing Beneficiaries

• Family Members

When choosing Life Insurance beneficiaries, you must consider the family members dependent on you. A spouse, children, parents, siblings, and other relatives are common beneficiary choices. Consider the severity of the financial impact your family members may face in your absence, and choose the beneficiary accordingly. You can explore our Savings Plans, Protection Plans, and Investment Plans to diversify and strengthen your financial well-being.

• Financial Dependents

You can choose people financially dependent on you as the insurance beneficiaries. Parents, spouse, and children can only be listed in this case.

• Charitable Organizations

If you want to give the policy proceeds to a trust or charitable organization, you must list its trustee as the beneficiary. The trustee can later claim the policy’s sum insured after your death.

• Legal and Financial Implications

Adding your family members or entities as beneficiaries in a Life Insurance Policy will give them legal rights to claim policy proceeds. They can receive direct payout into their account by avoiding potential legal complications like lengthy probate proceedings, complex estate planning proceedings, and other challenges. Beneficiaries will be subject to tax implications, depending on who the beneficiary is.

For example, if a policyholder lists an estate as the beneficiary, their heirs must pay estate taxes. But if the beneficiary is a family member, then the death proceeds will be tax-free. If you invest in our Shriram Life Early Cash Plan or other Retirement Plans, your spouse, children, parents, or other individual beneficiaries will receive tax benefits along with other advantages like returns powered by compounding, cash bonuses, etc.

Updating Beneficiaries

Naming beneficiaries and updating them is crucial because it ensures the right beneficiaries receive the policy’s death benefits without any challenges. You shouldn’t add the beneficiary once and forget if you have a Life Insurance Policy. For example, if you purchased the policy when you were single, you would have listed your parents as the primary beneficiaries.

But after your marriage, you must also include your spouse in the beneficiary list. Children can also be included after you become a parent. Similarly, you will need a beneficiary change in case of the unfortunate demise of the previously listed beneficiaries or the event of an unexpected event such as legal separation/divorce of spouses. It is important to plan your beneficiary list and update them as needed.

Common Mistakes to Avoid

Some policyholders unknowingly make mistakes while listing their Life Insurance beneficiaries, leading to disputes during claim processing. If you don’t want your family to experience something similar, ensure you avoid making the following common mistakes.

Naming a Minor as Beneficiary

If you list children aged below 18 as your beneficiaries and you die before they become adults, then insurance companies will not give policy proceeds to them. You can list a legal guardian or custodian for the child to manage money on your child’s behalf until your kids reach 18 years of age.

Not Being Specific

Policyholders who have children from their previous marriage and current marriage should be specific while listing their beneficiaries. Instead of listing ‘my children’ as beneficiaries, mention the name of the children for clarity. It will avoid confusion at a later stage. The specificity rule should be followed by every policyholder, especially by people with complex family dynamics.

Not Selecting a Contingent Beneficiary

Life is unpredictable, so you must choose beneficiaries accordingly. Instead of only choosing a primary beneficiary, list a contingent (secondary) beneficiary to ensure policy proceeds are received even if the primary beneficiary dies before the policyholder.

Conclusion

People invest in Life Insurance policies so their dependents don’t face financial hardships after their death. However, the intended purpose of policy purchase cannot be fulfilled if the right beneficiaries aren’t listed in the policies. If you want your family or other dependents to live a life of ease and comfort when you’re not around, always list rightful beneficiaries. You must also review and update them from time to time, especially after events like a wedding, childbirth, divorce, etc.

If you have finalized your beneficiaries and are looking for good policies to secure your family’s financial future, consider exploring our Shriram Life Assured Income Plan. It features multiple benefits, such as assured income, additional protection, higher benefits for higher premiums, etc. You can contact Shriram Life Insurance to seek guidance in choosing the right plan aligned with your financial goals.