INSURABLE INTEREST - To buy an insurance policy on some- one’s life, you must have an insurable interest in that person, which means that you would suffer a financial loss if he or she died. The law assumes you have an insurable interest in your own life and the lives of your spouse and dependents. Others must prove they have an insurable interest if they want to buy a policy on your life.
The buyer only needs to prove an insurable interest at purchase. If circumstances change—such as through divorce or the dissolution of a business partnership—the person named as beneficiary, even if he or she is also the policyholder, can usually still collect a claim at the death of the insured.
When you buy life insurance, you must make two important decisions—who will own the policy and who the beneficiary or beneficiaries will be.
The customary approach is for the owner and the insured to be the same person, but it’s not the only alternative. It’s a good idea to check with your tax or legal adviser to see if it makes more financial sense for someone else to be the owner. You can choose any beneficiary you wish—and if you own the policy you can easily change your initial designation, add other primary beneficiaries, or identify secondary beneficiaries.
If there’s a major change in your life, such as a marriage or a divorce, you should check with your agent about updating your beneficiary designation. Since you buy life insurance to provide security and comfort in an emotionally trying time, you don’t want to risk exposing your survivors to additional stress and potential litigation.
WHO GETS THE BENEFIT? - When you name the beneficiaries of your life insurance policy, you should consider how the death benefit will supplement other assets you leave to your heirs, and what the effect will be on the people who receive the money.
You may feel comfortable leaving everything to your spouse. But you may want to choose secondary beneficiaries, in case that person is no longer living— if you die together, for example. If the beneficiaries are minors, a guardian, custodian, or trust must manage the money for them until they reach the age of majority. So if you name children as beneficiaries, you must consider designating someone to manage funds in their interest.
Contributions from the book Guide to Understanding Life Insurance in this press release are used with permission from Light Bulb Press.