Life insurance exists to protect your beneficiaries if you pass away. It does so by paying out a substantial sum of money called a death benefit, which can be used to replace your income and pay off debts. But in some instances, beneficiaries may pass away before the policyholder. If this happens, the policyholder will need to take action to make sure their death benefit still goes where they want it to go by making changes to their beneficiaries. This article will show you what to do if your life insurance beneficiary passes away while your policy is in force.
1. Choose a new beneficiary
First and foremost, you must pick a new beneficiary. If you do not do this, your life insurance death benefit will be paid to your estate with the rest of your assets when you pass away. This is not often optimal for the policyholder. For one, if you have no estate plan, your death benefit and the rest of the estate may not go where you want it to. Even if you have an estate plan, passing your estate to your heirs may take longer than paying them the death benefit.
Death benefits are tax-free when paid directly to the beneficiary, whereas estates are generally subject to federal and state estate taxes. If your death benefit is placed in your estate, your estate’s beneficiaries may receive less of the death benefit since some will go to taxes.
2. Consider additional beneficiaries
You don’t have to stick with a single beneficiary. You can distribute your life insurance across multiple beneficiaries if you want. For example, you may name your spouse, your sibling, and a charity of your choice as your three beneficiaries and split the death benefit equally among them. If one beneficiary passes away and you don’t take action, the remainder may be divided among the other beneficiaries, protecting your death benefit from going to your estate.
3. Name contingent beneficiaries
Life insurance policies let you name contingent beneficiaries, essentially backup beneficiaries. If your primary beneficiaries pass away, your contingent beneficiaries are next in line to receive the death benefit.
Naming contingent beneficiaries can be relatively easy. First, contact your insurer and inform them you’d like to add contingent beneficiaries, then provide them with each beneficiary’s information.
4. Consider a life insurance trust for children
If you’re getting life insurance primarily to care for your children, forming a trust and naming it the beneficiary is a good idea since children can’t generally be named as beneficiaries while they’re minors. That way, the trust will receive the death benefit if you pass away. The trust will manage the proceeds until your children reach the age of majority, and then they can receive the payout.
The bottom line
Beneficiaries are at the core of any life insurance policy since they’ll receive the death benefit. But if they pass away or become unable to receive it, you can take action to make sure your wishes are met.
First, you should pick a new beneficiary and consider naming multiple beneficiaries. Then, name contingent beneficiaries just in case. Finally, consider creating a life insurance trust if your policy is primarily for your children. Following these steps will help ensure your life insurance meets your wishes, regardless of what happens.