Life insurance is an essential financial tool that can provide a sense of security and protection to loved ones when the insured passes. While a lot of attention is placed on the importance of purchasing life insurance, being named the recipient—or “beneficiary”—of a life insurance policy has responsibilities and considerations of its own.
If you’ve been named a beneficiary of a life insurance policy, it may be valuable to have discussions with the insured—your parents, for example—long before the unfortunate time comes that the “death benefit” is paid. Although it may be a difficult topic, this conversation can help clarify important details about the policy and ensure a smooth process when it’s time to file a claim. Here are some important considerations for beneficiaries when approaching this subject.
While it may be difficult, it matters to the insured that you understand their wishes and what you’ll need to do at the appropriate time.
Initiating the conversation
Approaching the topic of life insurance can be challenging. After all, the conversation is ultimately about your loved one dying and what happens afterwards. Find an appropriate time—when they aren’t preoccupied with other concerns—and a quiet place free from distractions. Make sure they understand the conversation is about their well-being and your intention to plan responsibly, rather than focusing on death.
Sometimes, the insured brings the topic up but finds that beneficiaries quickly change the subject because they don’t like to think about a loved one being gone. Listen for those opportunities. While it may be difficult, it matters to the insured that you understand their wishes and what you’ll need to do at the appropriate time.
Understand the policy
Educate yourself on life insurance in general and come prepared to get the clarification your need from the insured about their specific policy. Details you’ll want to obtain include:
- The name of the issuing insurance company
- The policy number, if known
- The death benefit amount
Write down the answers and keep them in a secure place. This may ease the stress associated with initiating the claims process down the road.
Verify beneficiary designations
Confirm that you are named as a beneficiary on the policy and that the insured’s primary and secondary (if applicable) beneficiary designations are up to date. Life events such as marriage, divorce or the birth of children may require adjustments to the designations. The insured may also have rules about how funds are spent, charities they wish to support, and other details that should be understood and updated in advance.
Clarify payout options
Discuss the payout options available in the policy. Beneficiaries typically have a choice between a lump-sum payment or receiving the money as steady payments over time. Understand whether you, as the beneficiary, have a choice or if your loved one has any instructions you’d be expected to follow.
Review any additional riders
Insurance riders are add-ons or enhancements to a basic insurance policy that provide extra coverage for specific situations or needs. Ask if there are any additional riders attached to the policy so you understand how they enhance coverage and the benefits they provide.
Review outstanding debts and expenses
This is a very important detail. Talk about the insured's outstanding debts and expenses such as mortgages that may need to be paid using the life insurance proceeds. Understanding this information can help you anticipate and plan for any financial obligations.
Keep documents organized
Keep all life insurance-related documents—such as copies of the policy, beneficiary designations and contact information for the insurance company—in a secure and easily accessible place. If the insured is the one keeping the documents, make sure you know where they are and how to access them so you’ll have everything you need to file a claim later on.
Encourage estate planning discussions
It’s important to have open discussions about overall estate planning, including the existence of a will, trust or other assets that may affect the distribution of money from the life insurance policy. Make sure this detail isn’t overlooked, as it may bring additional stress to an already challenging situation later.
Don’t wait until it’s too late
Initiating a conversation about life insurance with your loved ones may be challenging, but it’s an essential step in ensuring that their beneficiaries are taken care of as they intended. By following these steps and approaching the topic with sensitivity and care, you can help pave the way for a smoother process when the time to file a claim comes.
Additional reading:
Life insurance beneficiary? Here’s how to collect your death benefit
