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 distributed 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.

  1. What information is needed 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 cannot be identified a court may have to determine who will receive the death benefit.

  1. 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 named as an irrevocable beneficiary. In these situations, both the policy owner and beneficiary must consent to change the beneficiary in writing.

  1. How frequently should beneficiary designations be reviewed?

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.

  1. 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 entitled to. 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.

  1. Should I name a minor as the beneficiary?

A minor can be named 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 is not allowed to 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, a guardian or conservator will be appointed 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.

  1. 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.

  1. 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 is not named, and the primary beneficiary predeceases the insured, policy proceeds will typically be paid to the estate of the insured. If the owner of the policy is not the insured proceeds will often be paid to the owner if no living policy beneficiaries exist.

  1. 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 received proceeds from a life insurance policy it can be attached by creditors of the insured. Thereby reducing or eliminating any liquidity needed by the estate.
  1. 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, assets of the trust can be distributed to beneficiaries via the trust instructions. Third, the trust can be updated and amended as the needs of the family change.

If the insured is in a position where their estate is exposed 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.

  1. 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 established to own and be the beneficiary of the 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).

The proceeds can then be used to 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 trust proceeds will be distributed to beneficiaries, while providing protection from any creditors.

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

The simple answer is yes. But, it can create problems when a policy is owned by one person on someone else’s life and a third person is named as the beneficiary. In this scenario, when the insured dies the death benefit may be considered a taxable gift from the policy owner to the beneficiary.

If you have any questions about beneficiary designations feel free to email us at jmericle@mericleco.com.

About Jason Mericle

Jason Mericle is the Founder of Mericle & Company. Mericle & Company is dedicated to helping families and business owners solve their life insurance planning needs.

The services offered range from basic term life insurance planning and policy reviews to sophisticated advanced income tax and estate tax planning solutions.

He compliments his extensive knowledge of life insurance products with an in-depth understanding of the different tax and legal structures for which they are used.

About Jason Mericle

Jason Mericle is the Founder of Mericle & Company. Mericle & Company is dedicated to helping families and business owners solve their life insurance planning needs.

The services offered range from basic term life insurance planning and policy reviews to sophisticated advanced income tax and estate tax planning solutions.

He compliments his extensive knowledge of life insurance products with an in-depth understanding of the different tax and legal structures for which they are used.

[DOWNLOAD]

2018 Whole Life Dividend Rate Summary

Discover how the top rated U.S. insurance companies dividends have performed over the past decade.

We have received your request for the 2018 Whole Life Insurance Dividend Rate Summary. Please check your email to access the information.

[DOWNLOAD]

The Life Insurance with

Long-Term Care Guide

Consider securing your family's financial future and yours with a combination of life insurance and comprehensive long-term care rider.

We have received your request for the Life Insurance with Long-Term Care Rider Guide. Please check your email to access the information.

Curious About How Much Life Insurance Coverage You Should Have?

Download the life insurance calculator worksheet to find out...

We have received your request for the Life Insurance Needs Analysis Worksheet. Please check your email to access the information.

[DOWNLOAD]

Restricted Property Trust

Case Study

Learn more about how a Restricted Property Trust can benefit you and your business...

We have received your request for the Restricted Property Trust Case Study. Please check your email to access the information.

[DOWNLOAD]

The Insider's Guide To

Estate Planning

Learn more about the different techniques used for estate planning...

We have received your request for the Insider's Guide to Estate Planning. Please check your email to access the information.

Share This