Life Insurance & Beneficiary Designations
If you buy life insurance for your family, or are offered a free or low-cost policy at work, you’ll be asked to name a beneficiary—someone who will receive any policy proceeds that are paid out at your death. While completing the paperwork, you may not give your choice of beneficiary much thought, and just put down the name of your spouse or kids. However, you need to take the time to think about your beneficiary designations. Many problems can arise down the road if your beneficiary designations are not completed correctly. Here are some tips that might help you think about your beneficiary designations:
1. If You Name a Child as Beneficiary, Put an Adult in Charge
If you’re buying life insurance to provide for your young children if something unexpected happens to you, don’t simply name your children as beneficiaries. There must be an adult in charge of any money they become entitled to. If you don’t arrange for someone to manage the money, a court will have to appoint someone to do it. The process of getting someone appointed can be very expensive and intrusive, and the money will be turned over to the child at age 19. You can avoid this scenario by setting up a trust and designating someone as “Trustee” to manage and spend the money for the child’s benefit. You would name the trust as the beneficiary of the life insurance policy.
2. Name Names
Always put down the full name of each person you want to be a beneficiary. Never designate a group, such as “my children,” as beneficiary. That can cause confusion and conflict later—for example, did you mean to include stepchildren, adopted children, children born outside marriage, children who were adopted out of your family, and so on?
3. Don’t Jeopardize a Beneficiary’s Eligibility for Government Benefits
If you want to steer money to a beneficiary with special needs, be very careful. Anyone who receives more than a small cash gift will lose important government assistance—for example, Medicaid coverage that’s crucial for a beneficiary who will never have a job that offers health insurance. Under current law in most states, you cannot receive Supplemental Security Income or Medicaid if you have more than $2,000 in “countable” assets (not all assets are counted for purposes of eligibility). You can, however, create a special needs trust for the person with a disability, and name the trust as beneficiary of your life insurance policy. A property drafted special needs trust will let the trustee (the person you choose to manage trust funds) use the proceeds for the beneficiary, without jeopardizing eligibility for benefits.
4. Always Name an Alternate Beneficiary
It’s always possible that the person you name as a beneficiary could die before you do, or even at the same time. Even if that scenario is unlikely, it’s a good idea to name an alternate (also called contingent or secondary) beneficiary, who would receive the policy proceeds if your primary beneficiary has died.
5. When Your Life Changes, Update Your Policy
It’s more common than you might think to find someone listed as the beneficiary of a former spouse’s life insurance policy. And after the policyholder dies, there’s nothing anyone can do about it. Update your beneficiary designations (pensions, retirement accounts, and payable-on-death bank accounts as well as insurance policies) whenever there’s a big life event: you get married, you divorce, or a child or grandchild joins the family.
6. Don’t Try to Use Your Will to Change a Beneficiary
If you want to name or change a life insurance beneficiary, go to the company and fill out the documents it requires. You can’t change a beneficiary in your will—the terms of your will have no effect on your agreement with the life insurance company.
7. Make Sure Family Members Know About the Policy
Millions of dollars’ of life insurance proceeds are unclaimed every year, because surviving family members don’t know the policies exist. If you are comfortable, tell your executor and the beneficiaries about the policies—and where to find the papers they’ll need. If you are not comfortable with telling the executor and beneficiaries, then make a list of all your policies and keep them with your original Last Will and Testament.
If you or a loved one has any questions about Estate Planning, please call your hometown law office of Townes & Woods, P.C. at 205-631-4019.