When was the last time you updated your life insurance coverage or the beneficiaries designated to receive the proceeds of your policy(ies)?
It’s hard enough to sit down and buy coverage in the first place. Once we have that coverage, many people stuff the policy in a drawer and forget about it.
There’s a danger in that decision though: Any time a major life event such as marriage, divorce, birth of a child, child reaching maturity, change of employment status or death in the family occurs, it’s the right time to consider updating your life insurance coverage and beneficiaries.
An upcoming wedding, for example, is an ideal time to consider if you need to change your life insurance coverage – or purchase your first policy – and revise or add a beneficiary.
After a wedding
When two lives, or two families, become one, a new house and new name aren’t the only possible changes. Life insurance policies are legal documents that could be impacted by major life events. Parents and couples may assume their life insurance benefits will automatically be paid to their children, including those that have now become their children through marriage.
But that’s not necessarily the case, points out Gigi Jones, a life insurance claims director at Colonial Life.
“If you don’t name a beneficiary, benefits could be payable to your estate or to your next of kin, depending on the policy language,” Jones says. “Next of kin could be your spouse, if living, or your children — but that includes only natural and legally adopted children. Step-children wouldn’t receive any proceeds under a next-of-kin provision. So if you want to include them, you’d need to name them specifically.”
Community property laws may alter a beneficiary’s entitlement to insurance proceeds. The insured’s spouse may be eligible to receive a 50% share of certain benefits even if the named beneficiary is someone other than the spouse, unless ERISA applies. The following states have specific laws regarding property (including life insurance) acquired by a husband and/or wife during their marriage: Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Puerto Rico, Texas, Washington and Wisconsin.
Bear in mind a minor child may not be able to receive the life insurance proceeds before age 18, unless the court appoints a guardian to handle the funds. Additionally, a minor child can’t assign any of their proceeds to cover funeral expenses.
In the extremely unlikely event you and your spouse die simultaneously and each of you have listed the other as your primary beneficiary, life insurance benefits could pass to your estate or next of kin, or to your beneficiary’s estate. Also keep in mind, laws vary by state.
“In some states, if a beneficiary survives the insured by even a minute, they’re considered to have survived and benefits will be due to that beneficiary’s estate — not yours,” Jones says. “Other states have a 120-hour survival rule, where the beneficiary must survive the insured by at least 120 hours to receive the proceeds.”
Best bet: Ask questions when you buy and when you make updates.
Putting out old flames
A new marriage is also a good time to make updates if you previously named a then-significant other as your beneficiary. It’s a mistake to assume your new spouse automatically becomes your beneficiary, Jones says. “I’ve seen claims where someone named a girlfriend/boyfriend or fiancée as their beneficiary, but at the time of their death they’re no longer in a relationship with that person. We don’t know if they meant to leave the person named as their beneficiary or not, but that person may still receive the proceeds.”
Your ex-spouse, on the other hand, may automatically be out. Some states have laws that automatically revoke an ex-spouse as beneficiary if you don’t re-designate them after your divorce. But if your state law doesn’t revoke an ex-spouse, or if your policy is subject to ERISA, the ex-spouse may still be eligible to receive the proceeds. Make the update and remove the doubt.
At open enrollment
Another optimal time to review life insurance coverage, including beneficiaries, is at open enrollment time for your benefits every year, usually around October or November. Review each policy separately, since beneficiary changes for one policy may not apply to others.
When considering updating beneficiaries, it’s also a good idea to review the amount of life insurance you have to make sure it’s both adequate and appropriate for your life situation. Ideally, you should have enough life insurance to cover eight to 10 times your salary when you’re in your prime earning years. If you’re nearing retirement, your life insurance needs may be different.
Whether you’re getting married, expecting children, or raising your family, purchasing life insurance can help give you peace of mind and financial protection through your working years and beyond. Preserve that peace of mind by reviewing the policy annually and updating your beneficiaries in a timely manner.
