Term plans are a sub-subject of the life insurance policy. Since it is a part of life insurance, the primary objective of term plan can be to secure your loved ones in your absence. Typically, your insurer can ask you to list down beneficiaries that you wish to cover under your term policy. After your demise, a term insurance plan can provide a payout called death benefit to your beneficiaries to maintain their standard of living in your absence.
Beneficiaries are those people who can benefit from the financial payout offered by a term plan. They may or may not be financially dependent on you. For instance, your spouse might be working, but you would still wish for his/her financial well-being after your demise. Hence, you might include your spouse as a beneficiary at the time of purchase of a term plan. As the policyholder, your insurer can allow you to cover a maximum number of two beneficiaries. Typically, you can choose from the following as your beneficiaries:
- Your parents
- Your spouse
- Your spouse and children
If you wish to add more than the maximum limit of beneficiaries under your term life insurance, you should equally divide the proceeds between the total number. Moreover, your insurer can allow you to name one member as a ‘contingency beneficiary,’ who can act as a backup when your chosen beneficiary passes away. Use a term insurance calculator to know how much your beneficiaries need in your absence.
When you fail to include any beneficiary under your term policy, your insurance company would pay the money usually to your estate. Under such a scenario, the creditors can become free to claim the payout if you hadn’t paid off the unpaid debts when you were alive.
Although term insurance covers your loved ones, you might have the freedom to update your beneficiaries based on your preferences. In case you have re-married or divorced, you can exclude the name of your partner or change the name of your spouse based on the current scenario and your choice.
Before naming a beneficiary, you should go through the following dos and don’ts mentioned below:
|Identify the primary beneficiary who will immediately receive the proceeds after your demise||Avoid naming your beneficiary as ‘wife,’ ‘spouse,’ or ‘children.’|
|Designate a specific percentage of money to your insurer to pay to your beneficiary||Never mention ‘estate’ as your beneficiary if you have family members who can benefit from the proceeds|
|Add a contingency beneficiary without fail||Don’t forget to include your adopted kids or your grandchildren|
|Check your term policy once every few years to make sure that the beneficiary designation is current||Keep the creditors away from benefitting from your term policy|
|Revise your term policy after a major change in your life, such as marriage, divorce, etc.||Refrain from adding a separate owner, named insured, and beneficiary of a policy to avoid tax complications|
|Do not include minors until and unless you have a designated guardian for the children|
Listing down your beneficiaries can seem easy. However, you should not take the decision in haste. As the policyholder, you should be able to understand who would be in need of the pay-out after your death. Therefore, put a lot of thought into picking the right beneficiary. If you don’t take time thinking, your family and your real estate property might end up into legal trouble.
As highlighted above, term insurance can aim to protect your family members, which is why it can offer death benefits. However, you can receive survival benefits today due to the introduction of smart term plans. Whether you choose a regular or smart term plan, beneficiaries would remain the center of your term policy and continue to receive term insurance benefits. Hence, choose an adequate amount of coverage to help your beneficiaries lead a comfortable life in your absence. Moreover, you should consult a financial expert to understand what a term insurance is in detail.