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Choosing a beneficiary is important and updating it when appropriate is critical.
Believe it or not, many life insurance applicants give little thought to choosing a beneficiary on their insurance policy. Think about it. The whole purpose of buying life insurance is so your beneficiary will be paid the insurance proceeds (death benefit). Shouldn’t an applicant seriously consider who that person or entity should be? Only if you care where the money goes and who it is supposed to help.
Insurance 101 tells us that you should always have a contingent beneficiary and you should never name your estate as beneficiary and here is why:
According to the experts at Insurance QnA…
What they’re trying to get across here is that you do not want your life insurance proceeds to go into your estate because they are not protected from creditors, and your surviving loved ones are likely never to see the money. Here are some other no-no’s you should remember.
Don’t name a child without Putting an Adult in Charge
If your intention for buying life insurance is to leave some money for your young children, do not name them as beneficiaries. You must put an adult in charge of the death benefit they are entitled to. Unless you arrange for someone to manage their money until they become a legal adult, the court will appoint someone to do it for you. Unless you want the court involved in your business after you die, you can do one of two things to make certain this doesn’t happen:
- Set up a custodianship under the Uniform Transfers to Minors Act (UTMA)
Every state allows this except for South Carolina, and almost every life insurer is familiar with this option. Using the UTMA allows for the custodian you name to manage the minors’ funds and use them only for the minor’s benefit until they reach a certain age, which in most states is 21.
- Set up a Trust
You can also set up a trust for your minor children, and designate someone you know and trust to be the “trustee” to manage and spend the money only for the child’s benefit. You would then name the trust you created as the beneficiary of the life insurance policy.
Always Name a Contingent (alternate) Beneficiary
It’s entirely possible that the person you select and name as the beneficiary might not outlive you. If this should happen, the insurer will pay the death benefit to the contingent beneficiary rather the paying to your estate (see Insurance 101 in the introduction).
Additionally, you should always discuss this with whomever you decide to receive the death benefit and let them know in writing about your final wishes. Legally, the beneficiary can do whatever they please with the death benefit, so you want to select someone you trust to carry out your final wishes.
Update Your Beneficiary designation when Things Happen
Life events call for changes in your insurance coverage. For example, if your marriage ends and you remarry, you will typically want the death benefit changed as well. This doesn’t happen automatically. You must initiate the change, either with your agent or directly with the insurer.
It’s more typical 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.
There will be many more designations that must be changed as a result of a life event like divorce, marriage, childbirth or other major changes in your life. You’ll need to update your life insurance, health insurance, pension plan, retirement plans, and a host of other important documents.
Be careful not to jeopardize Government Benefits
If you are considering choosing a beneficiary who has special needs, you should be careful. In many cases, anyone who gets more than a small cash gift could put their government assistance in jeopardy.
For instance, your beneficiary might lose some or all of their Medicaid or Supplemental Security Income if they receive more than $2,000 in countable assets.
To make sure this doesn’t happen, you can create a special needs or supplemental trust for the special needs beneficiary, and then simply name the trust as the beneficiary on your insurance policy. You properly drafted special needs trust will let the trustee (the person you choose to manage trust funds) use the death benefit for the beneficiary, without jeopardizing eligibility for benefits they are receiving from the government.
Use Complete Personal Names
Always list the full name of each person when you are choosing a beneficiary. You should never list a group, such as “my children,” as beneficiary. Not being specific 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?
Regretfully, your death could cause a family feud if you or your agent are not specific about naming a beneficiary and contingent beneficiary. Don’t make it possible for someone to guess what you were thinking after you’re gone.
Certainly, you may have questions regarding the rules concerning beneficiaries on your life insurance policy so give your agent the opportunity to earn their commission. Ask questions about everything you are not clear on. Your insurance policy is a contract between you and the insurer, and although it can be modified, it is very important to have it drafted properly in the first place.
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