Adding Beneficiaries: Life Insurance Flexibility And Control

Choosing a life insurance beneficiary is an important step in owning a life insurance policy. A life insurance beneficiary is the person or entity designated to receive the proceeds of a life insurance policy upon the insured’s death. While you can name almost anyone as a beneficiary, it's important to consider who will be most impacted by your death and ensure your beneficiary designations are kept up to date. In most cases, you can change, add, or remove revocable beneficiaries at any time, but it's important to check the specific rules of your insurance provider.

Primary and secondary beneficiaries

When filling out forms for your life insurance policy, you may be asked to distinguish between a primary and a secondary beneficiary.

Primary beneficiary

The primary beneficiary is the individual who is first in line to receive the death benefit from your life insurance policy. Typically, this is your spouse, children, or other family members. If you have multiple primary beneficiaries, you can choose how much of the payout each party receives. For example, you might allocate 50% to your spouse, 30% to your child, and 20% to a local charity. No matter how you divide a life insurance payout among beneficiaries, the percentages must add up to 100%.

Secondary beneficiary

The secondary or contingent beneficiary may be eligible to receive the remaining account assets if there are no other surviving primary beneficiaries when you pass away. If you name your spouse as the primary beneficiary and your children as secondary beneficiaries, the children will only be entitled to inherit assets if the spouse passes away before you do or does not claim entitlement to those assets.

You can designate a charity, trust, or another entity as your primary or secondary beneficiary. You may choose multiple primary and secondary beneficiaries depending on your individual needs.

It's important to keep your beneficiary designations up to date as your life changes (marriage, children, divorce, etc.).

Naming a minor as a beneficiary

While it is possible to name a minor as a beneficiary of your life insurance policy, it is not recommended. Minors cannot directly receive the proceeds of a life insurance policy, and the process of appointing a custodian or guardian to manage the funds can be lengthy and costly. This could delay the payout and prevent the money from being used as intended.

If you want your life insurance payout to go to your minor child, it is better to set up a trust for them. This way, they will receive the benefit promptly and without having to pay taxes or legal fees. A trust is a legal document that spells out who you choose as the trustee and how you would like the money to be managed and spent. You can also create an irrevocable life insurance trust if you want to reduce estate taxes and leave a larger inheritance.

Another option is to name a custodian to help your minor child claim and manage the death benefit. A custodian is responsible for claiming the death benefit on the child's behalf and will manage the money until the child turns 18. It is important to name a custodian that you trust to act in your child's best interest.

You can also name your spouse as the primary beneficiary and your trust as the contingent beneficiary. Your spouse can continue managing your household finances and set money aside for your child's future. If both parents die, the trust can take over.

Choosing a beneficiary: family members

Choosing a beneficiary for your life insurance policy is an important step in owning a life insurance policy. While it may not be a simple decision, it should be done thoughtfully and carefully. Here are some things to consider when choosing family members as beneficiaries:

Spouse as a Beneficiary

If you are married, naming your spouse as a primary beneficiary is often the go-to option. This way, your partner can use the proceeds of the policy to help provide for your children, pay the mortgage, and ease the economic hardship that your death may bring. This is true even if one spouse is a stay-at-home parent. In the case of a stay-at-home parent's death, childcare and household upkeep expenses would need to be covered. In this scenario, it is recommended that both spouses have a policy with their partner named as the primary beneficiary. Don't forget to also include contingent beneficiaries, who are usually the parents or designated guardians of the children.

Children as Beneficiaries

If you are a parent, whether single or married, you may want to buy a term life insurance policy to ensure your child will be taken care of financially if you die. You can name your child as a beneficiary, but it is important to note that life insurance companies cannot pay out a policy to a minor. Most states utilise the Uniform Transfer to Minors Act, which allows the proceeds from a life insurance benefit to transfer to a child's named custodian. You can also consider naming a trust as a beneficiary on behalf of your child or a trusted family member who has the best interests of your child in mind.

Parents as Beneficiaries

If you are unmarried and have no children, you may consider naming your parents as beneficiaries, especially if they have co-signed on your mortgage, student loans, or car loans. By doing so, you can help them shoulder the financial burden of these agreements in the event of your death. Additionally, consider naming the person who would likely take the lead in making your funeral arrangements as a beneficiary to prevent them from bearing the financial burden of the funeral expenses.

Siblings as Beneficiaries

If you are unmarried and have no children, you may also consider naming your siblings as beneficiaries, especially if you have a close relationship with them and they are financially dependent on you.

Multiple Beneficiaries

You don't have to choose just one beneficiary. You can name multiple primary and contingent beneficiaries to ensure that your bases are covered. For example, you can name your spouse as the primary beneficiary and your parents or siblings as contingent beneficiaries.

Remember, you can always change your beneficiary as your life circumstances change. It is important to reassess your life insurance beneficiaries after major life changes to ensure that the right people are protected.

Changing beneficiaries after a divorce

Legal Restrictions

During divorce proceedings, there may be legal restrictions on changing beneficiaries. It is essential to consult with a lawyer to understand the specific laws in your state. For example, in Massachusetts, an automatic financial restraining order goes into effect upon filing for divorce, prohibiting changes to life insurance beneficiaries.

Impact on Negotiations

Changing beneficiaries during a divorce can negatively impact negotiations. As noted by Brette Sember, a former divorce attorney and mediator, "your divorce will be settled or decided as one big package, and all the accounts you're looking at are part of that package. If you start fiddling with them, you're going to not only wreak havoc with the negotiations, but you're going to spend more in legal fees to sort it all out."

Custody and Child Support

If there are minor children involved, changing beneficiaries could affect them, especially if they are listed as alternate beneficiaries. Additionally, taking actions that financially impact the other spouse could indirectly impact child custody cases.

Court Settlement

Once the divorce is finalised, you may be able to change beneficiaries as long as it adheres to the settlement agreement. For example, you may need to keep your spouse as a beneficiary on a life insurance policy during child support and alimony payments but can change beneficiaries on other accounts not included in the settlement.

Informing Beneficiaries

It is important to inform beneficiaries of any changes to avoid confusion and ensure they are aware of their rights.

State Laws

Different states have varying laws regarding beneficiary designations after a divorce. For example, in Florida, a 2012 legislative change allows insurance carriers to review the marital status of the deceased and determine whether to pay benefits to a secondary beneficiary if the beneficiary and the deceased are not married. On the other hand, Missouri law specifies that unless a former spouse is specifically renamed as the beneficiary after divorce, it is assumed that life insurance benefits should go to someone else.

Federal Law

It is worth noting that if a legal battle over beneficiaries reaches a federal court, federal law will prevail over state law. The U.S. Supreme Court has ruled that the named beneficiary takes precedence even if they have signed a valid spousal waiver.

In conclusion, changing beneficiaries after a divorce requires careful consideration of legal, financial, and familial factors. Seeking legal advice and understanding your specific state laws is crucial to making informed decisions.

Naming a trust as a beneficiary

Common Trusts Used as Beneficiaries

You can choose between an irrevocable trust and a revocable trust as your life insurance beneficiary, each with its own pros and cons. A revocable trust is more common among young families as it offers flexibility and can be modified by the owner. On the other hand, an irrevocable trust cannot be changed once established.

Tax and Financial Advantages of Trusts

By naming a trust as your life insurance beneficiary, you can potentially minimize taxes on your life insurance benefits. Life insurance payouts typically go to a spouse or partner tax-free. However, naming someone else as a beneficiary may result in estate tax, probate process delays, and a lack of control over how the benefit is used. A trust helps address these issues by allowing you to control the distribution of funds and avoid probate.

How to Create a Trust

You can create a trust through an estate planning attorney or online solutions like Trust & Will. While creating a trust can be pricey and time-consuming, it ensures that your heirs won't have to bear the same costs and delays associated with probate.

Pros of Listing a Trust as Your Life Insurance Beneficiary

Listing a trust as your life insurance beneficiary offers several advantages. It helps you sidestep probate, control the cash flow to your beneficiaries, and integrate your life insurance policy into your overall estate plan. This ensures that your wishes are respected and your beneficiaries receive the intended benefits.

Cons of Listing a Trust as Your Life Insurance Beneficiary

One significant drawback of listing a trust as your life insurance beneficiary is the cost and time required to set it up. Additionally, you need to have additional estate planning pieces in place, such as a will, which can be contested by heirs for a longer period than a traditional will.

Considerations and Caveats

While naming a trust as your life insurance beneficiary offers benefits, it's important to consult professionals like an estate planning attorney and a financial advisor. They can guide you through the legal process, ensure your trust aligns with your goals, and help you navigate the tax implications, which vary depending on the type of trust you create.

In conclusion, naming a trust as a beneficiary of your life insurance policy can provide lasting security for your beneficiaries and help you achieve your long-term financial goals. However, it's a decision that requires careful planning and professional guidance to navigate the complexities involved.

Frequently asked questions