Picking beneficiaries is often times an afterthought, but it should never be. One of the main purposes to life insurance is to help take care and protect those that you love or in this case would pick as your beneficiaries shall an unexpected event take place. It also counts as another step in completing the purchase and having it in place. These matters take some careful thought and attention to detail but is relatively simple – and may provide peace of mind to those you care about the most.
Where Does the Money Go?
Generally, if you name a beneficiary in your policy, the money goes directly to that person or organization, and does not go through your estate. This avoids any probate or federal estate tax payments. But if you name your estate as primary beneficiary, the proceeds of your policy will typically become part of your gross estate, and possibly become subject to federal estate taxes.
Financial experts suggest working around this a couple of ways:
- You can establish a trust, and have the trust purchase the policy, so the policy is not under your individual name,
- You can place an existing policy into an irrevocable life insurance trust.
With the latter, the government requires that you live at least three more years after putting an existing policy into a trust, or else it can tax the proceeds as though they weren’t in a trust.
Crafting and Establishing Your Policy
By crafting your policy in clear and detailed terms, and making any needed changes or updates right away, you’ll eventually save your family much frustration, complications, and heartache. Changing or contesting someone’s beneficiary status after an insured person dies is a legal matter that can be extremely difficult, time-consuming, and potentially costly. So, updating a policy the moment something important changes is a must. While establishing your policy it is important to remember the following:
- If you list descendants among your beneficiaries, you’ll need to add new children or grandchildren when they’re born or change language that excludes them.
- Divorce and remarriage should always spur a review of your policies and beneficiaries.
- Even updating relatively minor points such as changing a daughter’s last name after she marries should not be overlooked.
- Your life insurance policy should not use vague language; put the persons entire name into the document.
- Naming your estate, the beneficiary of life insurance proceeds rather than naming specific individual beneficiaries is not the best option – it means your life insurance policy must go through the probate process, which can be time-consuming, and can subject your proceeds to estate taxes.
It is critical to name contingent beneficiaries in case something was to happen to your primary beneficiary. If you name children, you may want to address whether their children should inherit proceeds if they’re not living. When naming children under 18, most individuals opt to name a guardian or trustee to be responsible for managing their inheritance finances if they receive proceeds before they’re adults. Irrevocable trust designations can’t be changed, so if you decide to go that route, be very sure about whom you designate.
How Should I Choose Beneficiaries?
When choosing beneficiaries, consider the various situations your family and loved ones might be facing when you pass away. Tackling these matters takes some careful thought and attention to detail but is relatively simple – and will almost always provide peace of mind to those you care about the most. For specific advice about what’s best for your circumstances, it’s wise to consult an investment professional or an attorney, especially if your estate is large or complicated.
- Choosing a Life Insurance Beneficiary, Guardian Life.