Life insurance is a wonderful gift to leave your beneficiaries. They can use the proceeds to meet their financial needs, such as paying for housing, or helping them to reach their goals, like going to college.
However, many people assume that once they name a beneficiary, the hard work is over. What they don’t realize is that there are still legal, financial and tax-related decisions that they must make. You will ensure your gift doesn’t become a headache for your beneficiaries by setting up the policy properly.
Your broker can help you navigate legal issues by asking you these questions:
Who Do You Want as Your Beneficiary? You can choose more than one person or entity to receive the benefit. The insurance company will provide you a beneficiary designation form, where you’ll list the names of your beneficiaries, and sign and date the document.
Use the same process for changing a beneficiary. Many people wrongly believe they can change beneficiaries by changing their will, but they must use the beneficiary designation form. Remember, you might not be able to change a beneficiary if you’re subject to a divorce decree or settlement agreement.
When choosing your beneficiary, you have many choices:
- Most people choose family members who are dependent on them for support. They could be your spouse or domestic partner, children, grandchildren, brothers and sisters, parents or other family members. Ask your broker about the laws in your state, because some states require you to name a beneficiary who has an insurable interest in your life or is related.
- Some people who feel their family is financially secure want to create a legacy after their death. They can choose a charity as a beneficiary.
- If you own a business, you could take out a key person life insurance policy and name your co-owner as a beneficiary.
Whomever you choose, your beneficiary designation is considered revocable, meaning you, as the policy owner, can name a different beneficiary any time, without asking permission from the previous beneficiary. Sometimes policyholders, to satisfy child or spousal support orders, set up an irrevocable beneficiary. This means you can’t change your beneficiary without their consent.
How Do You Plan to Identify Your Beneficiaries? Before signing the beneficiary designation form, you must decide if you want to use the beneficiaries’ names or descriptions. Some people will just list “spouse” or “all children born from this marriage.” You might think this will make it less likely you have to update your form in the future, but it can cause problems. For instance, if you adopted a child, your son or daughter might miss out on the benefit. Or, if the insurance company has to search to determine exactly who is included in the benefit, it could be some time before your beneficiaries receive the policy’s proceeds.
You also can designate your beneficiaries by “branches of the family or lineage.” The life insurance proceeds would be divided equally among your surviving beneficiaries.
Who Inherits First? There are two categories of life insurance beneficiaries. You should name at least one person to each category:
- The primary beneficiary is the person who receives the proceeds after you die.
- The contingent beneficiary is the person who receives the death benefit if the primary beneficiary dies before you do or at the same time.
Who Will Look After the Financial Affairs of Your Minor Children? If your children are beneficiaries and are under the age of legal consent, you must name a legal guardian as a beneficiary. Some policies limit you to appointing people who have a relationship to the child: a spouse, parent, grandparent, brother or sister. You also may designate an adult custodian using the Uniform Transfers of Minors Act. Talk to an estate attorney about the option that best fits your situation.
Do You Have a Lifelong Dependent Child? A child who has a special need could lose out on government assistance, such as Supplemental Security Income or Medicaid, if they receive a gift or inheritance of more than $2,000. Work with an attorney to set up a special needs trust and name the trust as beneficiary. Your appointed trustee will manage the fund for your dependent.
How Often Should I Review My Policy? It’s best to review your policy any time you go through a major life change, such as marriage, childbirth, adoption or divorce.
Remember, whomever you choose, make sure they know that they are your beneficiaries, so they will know to claim the benefit after your death.