Every life insurance plan requires you to name a beneficiary. Your beneficiary is the person you have chosen to receive the death benefits of your life insurance.
It seems simple, but naming beneficiaries could be one of your most important estate planning steps. Here are six important points to consider.
- Your beneficiaries may or may not be consistent with the distribution plan in your Will or Trust. It is common to customize your estate plan by designating beneficiaries on life insurance policies in a way that is different from the devisees in your Will or the beneficiaries in your Trust. Coordinating all of these details is an important part of the advice you should receive from your estate planning attorney.
- Naming a minor as a life insurance beneficiary is generally a bad idea. There are many reasons why naming a child as a beneficiary for life insurance is not good practice. A few of those reasons are:
- Your child cannot receive death benefit proceeds until the child reaches the age of majority. This age varies by state.
- In many circumstances, a court-appointed guardian or conservator for the minor must receive the benefit. This is generally expensive and complicated.
- If no guardian or conservator is appointed, the money which you intended for your child’s care may be difficult to access for many years.
- Once your child reaches the legal age of majority, the child will receive a large amount of money all at once. Most children are not financially mature at age 18 or even 21.
- Best practice calls for establishing a Trust for your children and naming the Trust as the beneficiary. Trust provisions will help safeguard the death benefits until the child reaches certain appropriate distribution ages.
- You can have more than one beneficiary. When you apply for life insurance, you are usually asked to pick two beneficiaries – a primary and a secondary. Generally, your secondary beneficiary receives the payout only if your primary beneficiary is deceased at the time of your death. You can also list more than one primary beneficiary and more than one secondary or contingent beneficiary.
- It is usually a good idea to talk to your beneficiaries. Tell them about your intentions and where to find your life insurance papers. If the information is stored electronically, your beneficiaries should know your login information and password.
- Naming your estate as your beneficiary requires special thought. Designating your estate as beneficiary could lead to a legal process called probate. Avoiding probate is generally a good idea, but sometimes probate is the best way to pass life insurance. Your estate planning attorney can explain the process and help you determine the best option.
- Your beneficiary designations will likely change over time. It is relatively easy to change a life insurance policy beneficiary designation. Review them regularly – especially after major life events, such as marriage, divorce, or the birth or adoption of a child.
We recommend an estate planning update every 3 to 5 years. Even if you are relatively sure that modifications are not necessary, it is a good investment in your peace of mind to have regular checkups with your estate planning counsel.
Posted by Gregory W. Deckert