Designating a Beneficiary on Your Life Insurance Policy

When you make the decision to purchase life insurance, designating a beneficiary is an important decision that you have to make. If you do not designate a beneficiary, many states will award the death benefit to your estate opening the door for probate and a petition from family and friends who may be fighting over the proceeds.  The following provides advice and tips on ensuring your life insurance benefit is received by the person you choose as your beneficiary.

Before purchasing a life insurance policy, you should know the reason why you need insurance in the first place.  This usually drives your decision of who to name as your beneficiary(ies).  Are you purchasing a policy so your family will not be financially burdened after you pass away?  Are you buying life insurance to secure your own business after you’re gone?  If so, your business partner or CEO of the company might be better suited as your beneficiary.  Whatever your reasons for purchasing a life insurance policy, you can ultimately name one, or multiple beneficiaries.  You could have one person who will receive the entire amount or divide on an equal or un-equal percentage among various beneficiaries. You can also name a non-living entity such as a charity or non-profit organization of your choice. You should always add contingent beneficiaries. This is often done in a family situation when there are younger children involved. For example, a father owns a policy and is the insured and names his wife as the primary beneficiary. Typically, the children or a sibling are added as contingent beneficiaries. The contingent beneficiaries would be paid the death benefit if the father passes away and the mother has predeceased the father.After purchasing a life insurance policy and naming your beneficiary(ies), make sure you update it for life events.

After purchasing a life insurance policy and naming your beneficiary(ies), make sure you update it for life events.  These life events include divorcing your spouse who was the primary beneficiary, getting married, your parents passing away, you have had additional children and you want to split the death benefit equally among them.  You need to be specific when naming the beneficiaries especially if you have more than one listed.  If you don’t make the appropriate changes, the money goes to whoever was listed at the time of your death and in cases where there were no contingent beneficiaries, the death benefit will become part of your estate and be potentially subject to estate taxation.

In the event of your death and your beneficiary is a minor child, some states will not allow the minor child to collect the death benefit.  In some cases, courts will get involved and appoint a guardian to manage the money. This process can be lengthy and the decisions on how the money will be best spent on your child’s welfare may not be what you had envisioned.  A better alternative if you have younger children is to set up a trust, with a trusted friend or family member as its trustee. The trust is named the beneficiary of the policy and will receive the proceeds. This accomplishes a couple of important goals. You can control how the money is to be invested, spent and ultimately given to your children once they reach a certain age. All these stipulations are decided by you and written into the trust document. The trustee is granted very specific powers and must adhere to the language in the trust.

If you have a will as well as a life insurance policy, make sure they mirror each other.  The beneficiary(ies) you have documented in your life insurance policy should also be outlined in your will.  When you update your life insurance policy, update your will as well or set up a trust and make the trust the beneficiary as stated above. The trust allows for more flexibility on distribution of the proceeds including the creation of other vehicles for grandchildren such as college savings plan.  If, for some reason, your will and life insurance policy do not coincide with each other, your life insurance policy will override what your will says because the policy is a contract with the life insurance company and your will isn’t. Establishing a trust will eliminate this issue as your wishes are stated clearly.Social Security Income (SSI)

It is important to note that if you name a beneficiary that receives Social Security Income (SSI), they may altogether lose or receive reduced payments because of death benefit payout depending on the amount of the death benefit.   The Social Security Administration states that anyone who receives SSI and/or Medicaid could possibly have their benefits reduced or suspended due to their increase in income.  The main factor is the size of the life insurance policy death benefit that they are receive.  The more money they receive, the more likely they are to have their Social Security payout reduced or eliminated.

Lastly, if you do not pick a beneficiary for your life insurance policy, the money will be paid to your estate and the proceeds will be distributed by a probate court.  This could take years to sort out, so make to appoint a beneficiary and update as necessary.  You will want to ensure your family or your business are taken care of in the event of your death.  You don’t your family to be responsible for your debts.   When purchasing your life insurance policy make sure you consider the need for income replacement, mortgage payoff, final expenses or education costs for your children or grandchildren.  When you answer these questions, this will help you know what amount of life insurance you need to purchase and who to name as your beneficiaries.

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