What Is The Meaning Of Allocation In Life Insurance?

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Choosing a beneficiary for your life insurance policy is one of the most important decisions you will make during the buying process. A beneficiary is the person or entity that you name in your policy to receive the death benefit proceeds. Deciding on the allocation of the proceeds between beneficiaries is also crucial. Here’s what you need to know about life insurance beneficiary allocation:

Beneficiary Designations
  • Primary Beneficiary – receives the death benefit first
  • Contingent Beneficiary – next in line to receive the death benefit if the primary beneficiary is deceased
  • Tertiary Beneficiary – “back up” beneficiary if both primary and contingent beneficiaries are deceased

When naming beneficiaries, it’s important to consider factors such as potential changes in your family situation and unintentionally disinheriting someone. To avoid this, it’s best to state your beneficiary allocation as “the proceeds of this policy are to be allocated equally among all of my children.”

Beneficiary allocation rules can also be applied to entities such as trusts. When a trust is named as a beneficiary, the proceeds remain in the trust and can only be used for the specific purposes designated. There are revocable trusts, where changes to the beneficiary designation can be made if you are the policy owner, and irrevocable trusts, where the amount of the life insurance proceeds will not be considered in the total valuation of your estate.

It’s important to review your life insurance coverage regularly to ensure that your beneficiaries are still the ones you want to receive the proceeds. Major life changes such as marriage, divorce, and the birth or death of a family member should prompt a review of your coverage and beneficiary allocation.

The receipt of life insurance proceeds can make a significant impact on the financial well-being of your loved ones. Working with an independent life insurance professional can help you navigate the process and find the best coverage for your specific needs and budget.

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