When you purchase a life insurance policy your life insurance beneficiary (the person, persons or entity (e.g. trust) that will receive the death benefit of your policy upon your death). The amount of unclaimed death benefits in the U.S. is staggering. In an article titled “How to Find Lost Life Insurance Policies” in the February, 2013 issue of ConsumerReports.Org, it is estimated that at least one billion dollars of life insurance death benefits are waiting to be claimed by policy beneficiaries. Will your life insurance benefits go unclaimed?, so we won’t dwell on that aspect here.
What I do want to address, however, is how to prevent this from happening. The first way is to designate your beneficiary wisely. The purpose of a well-drafted beneficiary designation for a life insurance policy is to provide information that will allow both:
And to make sure your beneficiaries won’t suffer the fate of the unclaimed benefits mentioned above, a clear, concise designation allows the insurance company to pay the claim settlement quicker than a designation that leaves room for interpretation.
It’s important that your life insurance beneficiary designation coordinate with your overall estate plan. Keep in mind that beneficiary designations usually supersede instructions in a Will as to how the benefit is to be distributed.
Bear in mind that major life changes might occur, such as the birth of a child, a divorce, the death of a beneficiary that could affect your original intent. This is why it is important to review beneficiary designations regularly with your agent/broker, hopefully in an annual policy review, and make sure they are still appropriate.
Naming a life insurance beneficiary sounds like a pretty straightforward process. Simply pick one or a few of your dependent loved ones and that’s that, right?
Well, not exactly. In the event of your death, you certainly want your benefits to go to the people you care about the most, but there are also plenty of other factors to consider. Here are 5 tips on how to go about selecting the right life insurance beneficiaries for your policy:
Your children are obviously at or near the top of your list of potential beneficiaries, but if they are underage when your policy goes into effect, they could have some trouble collecting their benefits.
Because insurance companies cannot pay benefits directly to minors, you are going to want to set up a trust, or appoint a guardian to watch over the money for them until they are of age to handle it themselves. You can name your children as your life insurance beneficiaries and also name an adult custodian under your state’s Uniform Transfers to Minors Act (UTMA). If you want the proceeds to go to more than one child, you’ll need to specify the percentage each receives. Otherwise the court will have to appoint a guardian for them, which can be a complicated and expensive process that could end up eating into their benefits and causing unnecessary added grief.
You don’t want your life insurance policy to go to waste. That’s why it is important to consider the spending habits of those you name on your policy. If one of your desired beneficiaries is notoriously irresponsible with their money (e.g. they have a gambling problem, they are still too young to handle large sums of money, etc.), you might want to consider putting their money into a trust, or appointing someone else to manage it for them with explicit instructions on how the money should be handled and released.
In some cases, receiving life insurance benefits can actually negatively impact a beneficiary’s financial situation. For instance, if your life insurance beneficiary is disabled or receiving government benefits of some sort, receiving a large life insurance payout could bump them out of the income bracket that allows them to qualify for their much needed benefits, leaving them worse off than they were before they received your life insurance money. You’ll want to keep this in mind when selecting your beneficiary.
All too often, people make the mistake of only naming a single primary beneficiary. Of course you want your spouse to receive benefits in the event of your death, but what happens if he/she passes away before you and you fail to name a contingent beneficiary on your policy?
When this happens, the money automatically goes into the estate where it is subject to probate. This means that your beneficiaries might have to wait for significant amounts of time to get their benefits.
If you have a life insurance policy, but for one reason or another you don’t feel comfortable leaving it to any individuals in particular, you can opt to put it all into a trust, or dictate that it be used to pay off business debts. Another popular option is to leave it to a charity of your choosing. If your family is already taken care of financially, a charity is a great way to see that your money is put to good use.
If you’re still unsure about who to select as your life insurance beneficary, talk to your insurance agent and review your options today. Regardless of who you decide to name in your policy, it is absolutely crucial that you let them know about it. If you pass away and they have no idea they have a payout coming their way, they might not go looking for it. Insurance companies usually don’t spend a lot of time tracking down your beneficiaries for you. So once you make someone a beneficiary, make sure they know that they’re on your policy and which insurance company to look for in the event of your death.