Who Should You Name As Your Life Insurance Beneficiary?

When you take out life insurance, you will be asked to name a beneficiary — the person or people who will receive the payout from your policy after you die. You can name multiple beneficiaries, and you can also specify the percentage of the payout you want each beneficiary to receive. While you can name almost anyone as a beneficiary, there are some restrictions. For example, if you live in a community property state and want to name someone other than your spouse as a beneficiary, you will need your spouse's written consent. It's also important to keep your beneficiary designations up to date, as your life changes.

Naming a minor as a beneficiary

Firstly, due to legal restrictions, minors cannot receive the death benefit directly. If you were to pass away before your child reaches the age of majority, the proceeds may be sent to the legal guardian of the child's estate, and the probate court will appoint a guardian if one has not already been designated. This process can be time-consuming and may delay the benefit payment to your child.

To overcome this challenge, it is recommended to assign a custodian or guardian for the child in your will. A custodian will serve as the guardian of the money and assets intended for the minor child and can make decisions in the child's best interest until they reach the legal age of consent. Alternatively, you can create a trust and name it as the beneficiary. A revocable trust, also known as a living trust, allows you to adjust the assets and beneficiaries over time, while an irrevocable trust provides tax benefits but cannot be adjusted without the beneficiary's permission.

Another important consideration is that naming a minor as a beneficiary may impact their eligibility for government assistance. Consult an attorney or financial advisor specializing in estate planning to ensure you make the best decision for your specific situation.

Choosing between per stirpes and per capita

When choosing beneficiaries for your life insurance policy, you may come across the terms "per stirpes" and "per capita". These are legal terms used to indicate how your death benefit should be distributed among your beneficiaries.

Per capita, meaning "by head" in Latin, is the default option for life insurance policies. It dictates that the death benefit will be distributed equally among all living beneficiaries. For example, if you have three beneficiaries, each will receive a third of the death benefit. If one beneficiary has passed away, their share will be divided among the remaining beneficiaries.

On the other hand, per stirpes, meaning "by root" or "by branch", allows the death benefit to be passed down to the next of kin or the family branch of a beneficiary if that beneficiary dies before the insured. This ensures that the deceased beneficiary's share of the death benefit goes to their family, rather than being divided among the surviving beneficiaries. For example, if one of your beneficiaries has passed away, their share will be divided among their children instead of the remaining beneficiaries.

The decision to choose between per stirpes and per capita depends on your family situation and preferences. If you have a small number of beneficiaries and want to divide your death benefit equally among them, per capita is a suitable option. Per capita is also a good choice if you want to designate your spouse, a trust, or a legal guardian as your beneficiary.

On the other hand, if you have multiple beneficiaries or want to ensure that your death benefit goes to your beneficiaries' heirs, per stirpes may be preferable. Per stirpes is also a good option if you want to leave money to your grandchildren or if the death of one of your beneficiaries would impact the financial well-being of the others.

It is important to carefully consider your family dynamics and financial goals when deciding between per stirpes and per capita. You may also seek guidance from a financial advisor or a legal expert to ensure that your life insurance policy aligns with your wishes and best serves your loved ones.

Naming a charity as a beneficiary

Identifying the Right Charity

It is crucial to carefully choose the charity you want to support. There are numerous charities with similar names, so ensure you have the correct legal name, address, and tax identification number of the organization you want to benefit. Websites like Charity Navigator can help you verify this information and assess how efficiently charities spend their donations.

Understanding the Process

Understanding the Tax Implications

It is important to note that there are no federal or state tax benefits associated with naming a charity as a beneficiary of your life insurance policy. However, if a charity owns your policy and you pay the premiums, you may be able to claim a charitable deduction. Consult a financial professional or tax advisor to explore tax strategies, especially if you're considering donating the proceeds of a permanent life insurance policy.

Considering Alternative Options

If you want more control over how your donation is spent, you can explore alternative options like adding a charitable giving rider to your policy or putting your policy in a trust. A charitable giving rider provides an additional payout to the charity without reducing the death benefit for your beneficiaries. On the other hand, placing your policy in a trust allows you to specify how and when the money is spent. However, setting up a trust can be complex and may require the assistance of an estate planning attorney.

Keeping Information Up to Date

Remember to update your beneficiary information whenever there are significant changes in your life, such as marriage, divorce, or the birth of a child. This ensures that your wishes are carried out accurately and that your chosen charity receives the intended benefit.

In conclusion, naming a charity as a beneficiary of your life insurance policy is a meaningful way to support a cause you believe in and leave a lasting impact on the world. By following the steps outlined above, you can ensure that your donation is directed effectively and efficiently.

Naming a trust as a beneficiary

Types of Trusts

There are two main types of trusts you can set up: a revocable trust and an irrevocable trust. A revocable trust offers more flexibility as it can be modified by the owner at any time and provides protection as the trust owner ages. On the other hand, an irrevocable trust cannot be changed once it is set up and is typically more complex and costly to establish.

Control and Protection

One of the primary benefits of naming a trust as a beneficiary is the control it gives you over your assets. By creating a trust, you can specify how the life insurance proceeds should be distributed and ensure they are used according to your wishes. This is especially valuable if you have concerns about the financial responsibility of certain beneficiaries. Additionally, a trust can help protect your assets from creditors, lawsuits, divorces, or other financial setbacks that your beneficiaries may face.

Privacy and Probate Avoidance

When a trust is named as the beneficiary, the distribution of life insurance proceeds remains private and does not go through probate. Probate is a lengthy and costly legal process where your estate is proven and then distributed to your heirs. By naming a trust as the beneficiary, you can avoid probate, ensuring that the money intended for your loved ones gets to them faster and without being delayed by legal fees or used to pay outstanding debts.

Estate Planning Efficiency

Considerations and Caveats

While naming a trust as a beneficiary offers several advantages, there are also some key factors to consider. Creating a trust and naming it as a beneficiary is a complex legal process that requires professional guidance from an experienced estate planning attorney and financial advisor. It adds an extra layer of complexity to the distribution process, so choosing a knowledgeable and trustworthy trustee is essential. Additionally, different types of trusts have varying tax implications, so consulting a tax advisor is crucial to understanding the potential tax consequences.

Naming a spouse as a beneficiary

If you are married, you will likely be given the opportunity to name your spouse as a primary beneficiary and then name an alternate (or secondary/contingent) beneficiary who will inherit the money if your spouse dies before you.

If you are the sole beneficiary of your spouse's retirement account, you have two options: rolling over the account or leaving it as it is, as an "inherited IRA". If you choose to roll over the account, you will need to contact the retirement account administrator and complete some paperwork. Once the account has been rolled over, you can name a beneficiary to inherit the funds. You will also be subject to required minimum distributions (RMDs) which will be based on your life expectancy. The benefit of rolling over the account is that you will not have to pay income tax on the money in the account, only on the money that is withdrawn. In the meantime, the funds in the account can keep earning tax-deferred income.

If you choose to leave the account in your deceased spouse's name, you will have the option to take RMDs based on your own age. This option is beneficial if you are younger than your spouse and want to leave the money in the account for as long as possible. However, if you need to withdraw money soon, it is important to consider that there is a 10% early withdrawal penalty for taking money out of a retirement account before the age of 59 1/2.

It is important to keep your beneficiary designations up to date, especially after major life changes such as marriage, divorce, or the birth of a child. In some cases, your right to change a beneficiary may be limited by a divorce decree or settlement agreement. If you are divorced, you may still be able to change your beneficiary, but in some cases, you may be required to name your divorced spouse or child as an irrevocable beneficiary. Therefore, it is important to carefully read your insurance policy and consult with your insurance company or a lawyer before making any changes.

Frequently asked questions