Do You Understand Basic Life Insurance Beneficiary Designations?

Do You Understand Basic Life Insurance Beneficiary Designations?

Life insurance agents and attorneys don’t always have the best reputation. However, when you have a good attorney or agent they are worth their weight in gold. Sometimes we wish we could carry them around in our pocket, especially when we are faced with immediate life insurance decisions.

One concept that is simple and also complex is that of beneficiary designations. Sometimes inadvertently we can make mistakes with our beneficiary designations that can mean disaster.

This article is not designed to be a treatise on all the ramifications of the different ways all beneficiary designations affects us, rather what affects most of us most often.

What is a beneficiary on my life insurance policy?

A beneficiary is simply someone who gets the money when you die if you have a life insurance policy. Of course people can be the “beneficiary” of your good will but for our purposes we are talking about life insurance.

Perhaps we should start with the life insurance policy. If you die and you don’t name a beneficiary then your full life insurance face amount is paid to your estate. It then makes the amount subject to “estate taxes.” Further, it is subject to claims by creditors.

The way to get around this is to name a beneficiary. Then the money passes directly to them without any form of taxation.

Most people set up their primary beneficiary as a “revocable beneficiary.” The primary beneficiary is the first person to get the money if you die. If you set them up as a revocable beneficiary that means you can change the beneficiary at any time. When you purchase the policy you typically will make yourself the owner of the policy so that you can make any decisions with respect to the policy that you wish.

Sometimes the insured outlives the primary beneficiary. That is why it is a good idea to name a secondary (second) and even tertiary (third) beneficiary. They get the money in numerical order if the beneficiary ahead of them dies and you don’t name another primary beneficiary.

Sometimes for various business reasons, a person may give another person or a business ownership of the policy which means they give up all rights of naming a beneficiary. They also give up all rights to any accrued cash value if applicable.

Another way that powers are manipulated is for an insured to retain ownership but to make the beneficiary irrevocable. They no longer can change the beneficiary but neither can anyone else so in this situation you got a standoff.

The most common beneficiary designation would be the spouse as primary beneficiary. The secondary beneficiaries would usually be the kids in equal shares.

If you have small kids then it is a good idea to see a lawyer (it is anyway even if you have no kids) and set up a trust and have their portion of the money paid to the trust with a named trustee.

One other time that life policies are used on a very regular basis is to insure a debt until it is paid off.

I hope, as you can see, even the very simple process of leaving your life insurance proceeds to someone needs to be done the right way.

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