Life Insurance for Newbies: What’s a Beneficiary?

Even if you’ve never had a serious discussion about life insurance before, it’s probably a topic you’re starting to think about, and maybe want to learn more about. But first-timers to the life insurance world, eager to protect their loved ones, are sometimes thrown for a loop by words that’ve been around for centuries. No worries! A good insurance agent will explain everything step-by-step and answer all your questions. One word you’ll need to learn is beneficiary.

Identifying Your Primary and Secondary Beneficiaries

When you begin to talk about a life insurance policy, your insurance agent will tell you about two basic kinds of beneficiaries; primary and a secondary.

A beneficiary is a person (or people or even an entity such as a charitable organization or place of worship) that receives the benefits of a life insurance policy, generally a cash amount, upon the death of the insured.

The primary beneficiary, as the name suggests, is the first named beneficiary, most often the spouse of the insured. The total policy benefit is usually paid to the primary beneficiary.

The secondary beneficiary (sometimes called the contingent beneficiary) is the person or entity that would receive the benefit if the primary beneficiary is unavailable or unwilling to accept it. Example: if the insured and the primary beneficiary (often the policy owner’s spouse) both pass away suddenly, the benefit goes to the secondary beneficiary.

Beneficiaries Aren’t Always People

In the case of a married couple with children, it’s logical to name the spouse as primary beneficiary and seems logical to name any children as secondary beneficiaries. However, if the children are young, naming them as secondary beneficiaries may be unwise. Why? Well, imagine a scenario where a couple dies suddenly, leaving a million dollar life insurance benefit payable to the secondary beneficiary – a 10-year-old child. Because the child is a minor, the benefit must be paid to someone on behalf of the child, usually a court-appointed financial guardian. Upon reaching age 18, the child will receive the full amount of the life insurance benefit with no oversight or restrictions. This is a situation which could end in disaster, as the spending urges of an 18-year old may not be reasonable. But there are ways to financially protect a minor surviving child.

Create a ‘Trust’ as the Secondary Beneficiary

For young children, creating a trust in the child’s name and designating the trust as the secondary beneficiary can make sense. A trust is a legal mechanism that’s been around since the Roman Empire, and legally holds & protects property (such as money) for future distribution to another person (such as a surviving child).

Life insurance may sound complicated but the best way to learn more is by talking to an agent you can trust. If you have questions about beneficiaries, primary or secondary, or want to learn more about protecting those you love most, an American Family Insurance agent can help.

*American Family agents do not provide legal advice and an attorney should be consulted for details about setting up a trust.


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