It is no fun to think about the day when a life insurance policy will need to go into effect, but it is even less fun to think about a day when a life insurance policy or a day when a life insurance policy goes into effect but does not benefit the beneficiaries that the insured had intended to designate. In listing the beneficiaries on a life insurance policy, the manner in which one lists the intended recipients of the policy can make a big difference in who, if anyone, actually receives the money. In taking a look at some of the most common discrepancies that can arise during a life insurance policy payout, one can avoid making some of the common mistakes.

The first thing to know is that not only does a life insurance policy have the ability to have more than one beneficiary; it really should have more than one beneficiary. In fact, a life insurance policy can have up to three "classes" of beneficiaries whereby if the person, people, or entities named in one class are all deceased, the benefits would then be paid out to the next class of beneficiaries. By listing multiple classes of beneficiaries the insured ensures that they still have some say in who the policy funds go to if those for whom the policy was intended have passed.

Listing a loved one by relationship

The way in which you list a loved one on the insurance policy can be one of the biggest roadblocks to the benefits payout. The wording is crucial when naming a benefits recipient because, depending on the words you choose, the beneficiary may change. You can opt to list a beneficiary by their relationship to the insured or by their name. Each has its benefits and drawbacks. If you choose to list by relationship, then whoever currently holds the role when the insured dies will be the one to receive the policy benefits. If you list “wife” as the beneficiary, for instance, it would consider the spouse at the time of death as the beneficiary but exclude any former spouses. It can be convenient if that is the insured’s intention, but you also run the risk of unintentionally excluding a loved one from coverage due to a relationship change.

Listing a loved one as a group

The clearest and most common example of listing beneficiaries as a group is naming the insured's children as a class. While typical parent-child relationships do not legally change over time, the definition of "child" can create problems. In situations where step-children, adopted children, and children born after the insured's death come into play, the meaning of the word child can become unclear and again the policy may end up excluding someone that the insured did not intend. On the flip side, there are also benefits of listing one's children as a group as it would also include any children that were not currently born when the beneficiaries were listed.

Listing a loved one by name

Listing a loved by their name provides a clear idea of exactly who the insured would like to receive the policy payout. In most cases, this is the best way to make sure that the policy upholds insured's intentions. However, there is still risk in specifically naming beneficiaries as well if the insured forget to update the list when new meaningful relationships develop, such as new children or a new spouse.

Many other issues can arise when listing beneficiaries on a life insurance policy, but one clear solution to mitigating those problems is to make sure you are incredibly specific when designating beneficiaries.  The more specific you are in who exactly is to benefit from the policy, the less likely any discrepancies will arise.

For more information contact: Skyline Risk Management, Inc. at (718) 267-6600