Naming Your Life Insurance Policy Beneficiary – Things to Consider

One of the most important parts of owning a life insurance policy is naming the beneficiary. It is important to understand what beneficiary designations are available to a policy owner to ensure the death benefit is disbursed in accordance with the needs, wants, and wishes of the insured.

Because of this, it is important to review beneficiary designations at least every 3-years to make sure those designations are in accordance with the current planning objectives. We have compiled the following list of questions and answers to help provide additional guidance.

What information do you need to designate a beneficiary of a life insurance policy?

When designating a beneficiary of a life insurance policy the insurance carrier will typically require:

• Full Name
• Date of Birth
• Social Security (or Tax ID)
• Relationship to the Insured (e.g. son, daughter, trust, business partner, etc.)

It is important to identify a beneficiary. In situations where a beneficiary is not identifiable, a court may have to determine who will receive the death benefit.

Can the owner of a life insurance policy change the beneficiary at any time?

Generally speaking, a policy owner may change the beneficiary of a life insurance policy at any time. There are scenarios where a beneficiary is an irrevocable beneficiary. In these situations, both the policy owner and beneficiary must consent to change the beneficiary in writing.

How frequently should you review beneficiary designations?

Life insurance policy owners should review beneficiary designations at least every three years or sooner. This ensures the policy will continue to meet the objective of the policy owner if circumstances have changed. Changes may be the result of death, birth, marriage, or divorce.

What if I have more than one beneficiary?

When designating more than one beneficiary it is important to identify a specific percentage of the death benefit or dollar amount each beneficiary is to receive. In situations where the beneficiaries receive equal shares of the death benefit, it is not always necessary to state a percentage for each.

If a beneficiary pre-deceases the insured, any surviving beneficiaries will usually inherit the deceased beneficiary’s interest in the policy.

Should I name a minor as the beneficiary?

An individual can name a minor as the beneficiary of a life insurance policy. If a minor is the beneficiary of the policy when the insured dies the life insurance carrier cannot transfer the death benefit directly to the minor.

Instead of naming a minor as a beneficiary the insured should consider establishing a trust for the benefit of the minor. In this process, the insured will appoint a trustee to manage, distribute, and invest the policy proceeds. This will help to avoid delays, expenses, and the burdensome process of having a court appoint a guardian or conservator.

In these situations, the court will appoint a guardian or conservator to receive the death benefit. From there, the guardian or conservator will administer the funds for the benefit of the minor until they reach the age of majority.

Should I name a person with special needs as the beneficiary of my life insurance policy?

Designating a beneficiary with special needs is typically not advisable. Proceeds received by a beneficiary with special needs could make the individual ineligible to receive funds from government-funded programs. This may include Supplemental Security Income, Medicaid, or funds from other government-funded programs. Life insurance proceeds received by a special needs beneficiary of more than $2,000 may disqualify them from receiving funds from these types of programs.

When using life insurance for a special needs beneficiary it is advisable to establish a trust for the benefit of the special needs individual. This can provide the necessary liquidity to support them throughout their lifetime without affecting their eligibility for government programs.

Should you name a contingent beneficiary?

A contingent beneficiary is a beneficiary who will receive the death benefit proceeds if the primary beneficiary predeceases the insured. When a contingent beneficiary does not exist, and the primary beneficiary predeceases the insured, policy proceeds are typically paid to the estate of the insured. If the owner of the policy is not the insured proceeds are typically paid to the owner if no living policy beneficiaries exist.

Should I name my estate as the beneficiary?

There are a few disadvantages to naming an individual’s estate as the beneficiary:

• Life insurance proceeds may be taxable to the insured’s estate. Depending on the size of the estate insurance proceeds may be subject to estate or inheritance tax.
• Insurance proceeds received by an estate will be subject to probate. This will result in increased expenses, delays, and the court determines who will receive the benefits. In addition, assets subject to probate become a part of the public record.
• When an estate receives proceeds from a life insurance policy they may be accessible by creditors of the insured. Thereby reducing or eliminating any liquidity needed by the estate.

Are there benefits to naming my revocable trust as the beneficiary?

Naming a revocable trust as the beneficiary of a life insurance policy can provide numerous benefits. First, life insurance proceeds received by the trust will not be subject to probate. Second, beneficiaries of the trust can receive distributions from the trust in accordance with the trust language. Third, you can update and amend the trust as the needs of the family change.

If the insured is in a position where their estate is subject to estate or inheritance taxes a revocable trust may not be the best option as proceeds will be includable in the owner’s estate. This will result in the death benefit being includable and subject to estate or inheritance taxes.

When does it make sense to name an irrevocable trust as the beneficiary?

For individuals and families with assets that may be subject to the estate tax and irrevocable trust can be a great option. An irrevocable life insurance trust (ILIT) can be set up to own and be the beneficiary of a life insurance policy. When properly structured and funded, proceeds from a life insurance policy will not be subject to income or estate taxes at the death of the insured(s).

Life insurance proceeds can provide liquidity to help pay for estate taxes. It also allows the grantor of the trust to provide instructions to the trustee as to how to distribute trust assets to beneficiaries while providing protection from any creditors.

Can the policy owner, insured, and beneficiary be different people?

The simple answer is yes. But, it can create problems when one person owns a policy on someone else’s life and a third person is a beneficiary. When the insured dies the death benefit may be a taxable gift from the policy owner to the beneficiary.

For questions about beneficiary designations feel free to email us at info[@]mericleco.com or submit an inquiry online.

DISCLOSURE

TAX ADVICE

Any tax advice contained in this communication is not intended or written to be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

These materials are not intended to be opinions or advice on legal, tax, accounting, or investment matters. Private counsel should be consulted prior to application of this general information to specific situations.

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable. We cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.