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They are call beneficiaries. As we continue to pick apart life insurance policies I wanted to touch on the subject of beneficiaries, how to choose them, and things not to do.

The owner of the policy designates the beneficiaries. Most often the insured is the owner, but there are times when another person, a wife, a business partner, or a trust might be the owner. It’s important for the insured to understand that if someone else owns the policy, the beneficiary designation is out of their control. The owner needs to be someone the insured trusts.

Beneficiaries are most often designated in two categories, primary and contingent. The primary beneficiary receives the entire death benefit upon the death of the insured. You can have more than one primary beneficiary, splitting the proceeds. This is often seen when children are beneficiaries and the parent wants to leave the money to them in equal (or unequal) amounts.

The contingent beneficiary comes into play if the primary beneficiary pre-deceases the insured or dies in a common accident. A common scenario here would be if the wife is the primary beneficiary and the children are the contingent beneficiaries. If the husband and wife die in a common accident, the insurance would go directly to the children.

There are other options that might be adviseable. When life insurance is meant to go to children, either directly or through a trust, it is worth considering whether you want the proceeds to be “per stirpes”. What this does, if a child has pre-deceased you, is leaves that portion of the proceeds to the spouse of children of your child.  This is often overlooked when considering beneficiary designations. Very important. It is your choice as the owner, but a good question might be, if the child were still alive and received the proceeds from your life insurance, would it be used to help benefit his or her family? If the answer is yes, the right thing might be to make sure that still happens.

Making your estate the beneficiary is a sure way to tie up the life insurance proceeds in probate for a very long time. There are a few valid reasons for this designation, but use it carefully and preferably only for a short period of time before it is changed.

Bottom line. Beneficiary designations are important decisions. If at all possible, always have a contingent to avoid the money going to probate. Keep in mind that the designations can be changed by the owner, who is usually also the insured.