One of the most important decisions you make when buying a life insurance policy is naming the beneficiary.
After all, that person, or persons, is the reason you’re buying the insurance; you want to provide some financial security for your loved ones when something happens to you. It’s important, therefore, to put some thought into who you are naming as your beneficiary and what information you provide on them.
Whoever you name as beneficiary, let them know.
If your beneficiary doesn’t know they’ve been named as such, how much the policy is for, and where the policy can be found, they may not know to file a claim when you die. It’s important to let them know.
Don’t forget to periodically update your beneficiaries.
It’s good practice to review your beneficiaries whenever your life (or lifestyle) changes. Just as your life changes, so do the lives of your beneficiaries. People move, get married or divorced, get older, and sometimes, die. If the beneficiary information is incorrect, it may cause an unnecessary delay when the money is needed most.
Don’t assume that a will overrides your life insurance policy.
Your insurance policy is a legal contract, which means that it, not your will, controls what happens to the policy proceeds when you die. If you divorced your ex-husband five years ago but haven’t changed the beneficiary, he’s still going to receive the money even though your will names your current husband as your beneficiary.
Don’t name a minor as beneficiary.
In most states, a child under age 18 is considered a minor and not legally responsible for their own actions and decisions. If you haven’t named a legal guardian in your will (you do have a will, don’t you?), the state court will step in to oversee the distribution of the death benefit, which can get very complicated. The court may name a non-family-member as guardian, if it chooses. That guardian will oversee the distribution and will have to prove to the court that the money is used for the child’s benefit. But once the child turns 18 (21 in some states), the child gets all the money, regardless of maturity, and can do with it whatever he or she wants. (If you had received a large amount of money when you turned 18, how much of it would you still have today?) Instead of naming the child as beneficiary, consider setting up a trust to receive the life insurance death benefit. That way, you can specify how the money should be paid out (installments, lump sum, etc.), when it should be paid out (at specific ages or for a specific purpose, like college expenses), and so on.
Don’t forget about government assistance.
If whomever you name as beneficiary qualifies for government assistance of any kind, receiving the death benefit could disqualify them from receiving further assistance. This is especially important if the beneficiary is a child or adult with special needs. In this situation, establishing a special needs trust would be a better option.
Don’t make your death benefit taxable.
Generally, life insurance death benefits are received income tax-free. Naming the wrong person as beneficiary, though, could make the payout subject to federal and state gift taxes. This happens when a third-party beneficiary is involved. For example, if you are the owner of a policy covering your spouse and you name your child as a beneficiary, the payout will be considered a “gift” for tax purposes and will be taxable as ordinary income. That can significantly reduce the money that was intended to financially support that beneficiary. To avoid this situation, the insured and the owner on the policy should always be the same person.
By taking care to avoid the mistakes listed above, you’ll save your loved ones unnecessary stress (and, potentially, a lot of money) when you die. Talk to your professional Pekin Insurance agent for more information. They can help you review your beneficiaries and make any updates that may be necessary.