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Financial Planning

The Importance of Designating a Beneficiary

2024-03-14

The loss of a loved one is one of the hardest things a family will have to face. It brings both expected and unexpected expenses, such as funeral costs, travel and lodging for family members, estate costs, and many more. That is why it’s important to ensure your life insurance policy has the correct designated beneficiary listed to secure the intended life insurance benefits to cover those expenses quickly.

What Is a Beneficiary?

A beneficiary is a person or entity you legally designate to receive the benefits from your life insurance policy, or other financial products.

Let’s consider your life insurance policy. There are many things to think about when naming someone as a beneficiary. You might include those who depend on your income to live, young children who will need support, financial obligations that need to be fulfilled at the time of your death, or possibly your personal interests to leave the life insurance proceeds to an organization or in a trust for your family, and many other scenarios.

If your primary beneficiary pre-deceases you, do you have an alternate designation? If you have not designated an alternate beneficiary, the insurance proceeds will be delayed and typically will be paid to the owner’s estate which will require a personal representative to appointed by a probate court resulting in additional expenses and delays.

When you designate a beneficiary, it is important you advise them of your decision. You should also inform your survivors where you keep important documents and ensure they have access to these documents (safe code, password for online accounts, etc.).

Additionally, your beneficiary needs to know which life insurance companies they will have to notify of your death. They should also know what to expect during the life insurance claims process and the documents they will need to provide, such as a government or state photo identification card and a certified or photocopy of a death certificate, and they will be required to complete and sign the life insurance claim forms.

Most insurance companies offer the beneficiary options of how the death benefit will be paid out. Payout options can include receiving the entire amount as a lump sum payment, receiving a period certain annuity, which is typically a monthly installment or leaving the death benefit with the insurance company, and receiving a monthly interest on the death benefit. Having an organized plan is key to a successful claims process.

Common Mistakes in Beneficiary Designations

While it seems straightforward to designate a beneficiary on a life insurance policy, there are some common mistakes that will delay paying the insurance policy benefit, including:

  • Naming a minor child
  • Naming an adult disabled child — this could make them ineligible for government benefits
  • Not updating the relationship of a beneficiary after a major life event such as marriage or divorce
  • Naming only a primary beneficiary or no beneficiary at all
  • Presuming that having a will is sufficient
  • Not informing someone that they are the beneficiary

AAFMAA Membership Is More Than Life Insurance

AAFMAA (American Armed Forces Mutual Aid Association) not only processes life insurance claims, but if you are a Member, our Survivor Assistance Services team will file for military benefits and entitlements on behalf of your survivors. This includes notifying Defense Finance and Accounting Services (DFAS) to stop retired pay, applying for the Survivor Benefit Plan (SBP) if elected, notifying Department of Veteran’s Affairs to stop disability compensation, prepare and submit VA (Veterans Affairs) claims for VA Burial Allowance and VA Dependency and Indemnity Compensation (DIC) — if applicable. We offer this invaluable service to help provide you and your survivors with peace of mind. To help you prepare for the future, download our Military Survivor Checklist.

There are several essential documents you should keep on file with AAFMAA to ensure a smooth claims process. Upload them anytime to your Digital Vault in the AAFMAA Member Center, including:

  • DD-214/Statement of Service or Discharge
  • Marriage Certificate/Divorce Decree
  • Legal documents (Trust, Will, POA (Power of Attorney))
  • All VA Disability Award Letters, and VA Rating Decisions

We recommend you annually review and ensure your life insurance beneficiary designations are current. Make sure you understand what they can expect during the claims process and identify and safeguard important documents, ensuring your survivors have access to them. If you don’t yet have a plan, make one now and discuss it with your beneficiary.

AAFMAA Can Help

Need to update your beneficiaries with us? AAFMAA requires all beneficiary changes to be made in writing using our Beneficiary Designation form. If you need help updating your beneficiary, or if you have questions, please contact Member Benefits at 800-522-5221, option 2, then option 2 again, or email [email protected].