Life Insurance: Splitting Benefits For Families Fairly

When it comes to splitting life insurance, there are a few options available to the policyholder. They can choose to have multiple beneficiaries, whether that be primary, secondary, or tertiary beneficiaries, and decide how the proceeds will be distributed among them. The proceeds can be distributed per stirpes, which means dividing by rank in the family, or per capita, which means dividing by the number of people. It is also possible to have a split-dollar life insurance plan, which is often used in executive compensation packages, where the cost of a premium for a permanent life insurance policy is shared.

Families can split life insurance benefits equally between multiple beneficiaries

When setting up a life insurance policy, one of the most important steps is listing the beneficiaries—the individuals or entities who will receive the policy's proceeds. While you're only required to name one beneficiary, it's recommended to have multiple. If the entire death benefit goes to one person and they are unable to accept it, the proceeds revert to the estate and may go through probate, where a court decides how the funds are distributed.

You can split the proceeds between multiple beneficiaries in various ways. You can leave 100% of the life insurance death benefit to one person, or split the proceeds between multiple beneficiaries. When naming beneficiaries, you may assign proceeds to be distributed per stirpes or per capita. Per stirpes means that proceeds are divided by rank in the family, while per capita means that proceeds are divided by the number of people. These distribution options help the claims process if any beneficiary were to die before the policy owner.

Of the two options, per stirpes is more common. If you have a fairly large estate, it's recommended to work with an estate planner to ensure that you avoid any unnecessary estate taxes.

It's important to note that the owner of the life insurance policy, in this case, the father, names the beneficiaries. The beneficiary cannot specify or change who the beneficiaries are. If the beneficiary wishes to share their inheritance with others, they are free to do so. Depending on the size of the policy, there may be no tax concerns. However, it is considered a "gift" from the beneficiary to the others, and there may be IRS gift restrictions.

Families can assign proceeds to be distributed per stirpes or per capita

When a family member passes away, the last thing you want is to be unsure about how to access the funds you need. It's important to understand the difference between per stirpes and per capita life insurance distribution methods to ensure your family's financial security.

Per capita, meaning "by head" in Latin, is the default method for distributing life insurance proceeds. In this case, the death benefit is split equally among all living beneficiaries. For example, if there are three beneficiaries, each will receive a third of the payout. If one beneficiary passes away, their share is then divided among the remaining beneficiaries. This type of distribution is suitable when there are a small number of beneficiaries, and the policyholder wants to divide the death benefit equally among them.

Per stirpes, on the other hand, means "by branch" or "by root" in Latin. This method ensures that the death benefit supports younger generations of the family. If a beneficiary passes away before the policyholder, their portion of the death benefit goes to their next of kin, typically their children, rather than being split among the remaining beneficiaries. For instance, if one of your children, who is listed as a beneficiary, passes away, their share of the death benefit would go to their children (your grandchildren) instead of your other children. This type of distribution is useful when the policyholder wants to ensure that their death benefit goes to their beneficiaries' heirs.

When choosing between per stirpes and per capita, it's important to consider your family situation and specific needs. Per capita is generally chosen when there are fewer beneficiaries, and the policyholder wants to divide the benefit equally. On the other hand, per stirpes is selected when there are multiple beneficiaries or when the policyholder wants to ensure that the benefit goes to the beneficiaries' descendants.

It's worth noting that the distribution method can be adjusted at any time to match life changes, and it's essential to review and update beneficiary designations regularly to reflect your current intentions and family dynamics.

Families can have primary, secondary and tertiary beneficiaries

Families can have primary, secondary, and tertiary beneficiaries when it comes to life insurance. This means that they can choose multiple people or entities to receive policy benefits in different ways and at different times.

The primary beneficiary is the first person or entity chosen to receive the death benefit. It is possible to name more than one primary beneficiary, who will each receive a percentage of the benefit. If one of the primary beneficiaries is no longer alive or is otherwise unable to accept the benefit, it will typically go to the remaining primary beneficiary or beneficiaries.

The secondary beneficiary, also known as the contingent beneficiary, is the next person or entity in line to receive the death benefit. They will only receive the benefit if the primary beneficiary is unable to do so. For example, if the primary beneficiary has passed away before the policyholder or is unable to accept the benefit for some other reason, the secondary beneficiary will then be eligible to receive it.

The tertiary beneficiary is the next person or entity in line to receive the death benefit if both the primary and secondary beneficiaries are unable to do so. For example, if both the primary and secondary beneficiaries have passed away or are otherwise unable to accept the benefit, the tertiary beneficiary will then be eligible to receive it.

It is important to name specific individuals or entities as beneficiaries and to update the beneficiary list regularly to reflect any changes in your life. This helps to ensure that your money is distributed correctly and according to your wishes.

Families can split life insurance benefits by assigning specific percentages of the death benefit to each beneficiary

When it comes to life insurance, an important aspect to consider is designating beneficiaries—the individuals or entities who will receive the benefits from your policy in the event of your death. While it is not mandatory to name a beneficiary, most people opt for life insurance to provide financial security for their loved ones after they're gone.

Here's how families can split life insurance benefits by assigning specific percentages of the death benefit to each beneficiary:

Understanding Primary and Contingent Beneficiaries

There are two main types of beneficiaries: primary and contingent (also known as secondary). Primary beneficiaries are the first in line to receive the death benefit and are typically spouses, children, or other family members. In the unfortunate event that the primary beneficiary passes away before or simultaneously with the insured, a secondary or contingent beneficiary can be named to receive the benefit. This could be another family member or a trusted friend.

Specifying Percentages for Each Beneficiary

When there are multiple beneficiaries, you can allocate specific percentages of the death benefit to each person. For example, you may choose to give 50% of the payout to your spouse, 25% to your child, and the remaining 25% to another family member or a charitable organisation. It's important to ensure that the percentages add up to 100% in total. If specific percentages are not provided, the insurance company may distribute equal shares to each beneficiary.

Updating Beneficiaries as Life Changes

It's crucial to keep your beneficiary designations up to date, especially after significant life events such as marriage, divorce, the birth of a child, or the death of a loved one. Life insurance policies should reflect your current wishes and circumstances. Most financial services companies provide forms or online platforms to make these updates.

Considerations for Minors as Beneficiaries

Naming minors as beneficiaries is possible, but it's important to consider that they cannot directly receive the death benefit until they reach the legal age of consent. To provide for minor children, you may appoint a legal guardian to manage the funds or set up a trust with a trustee to oversee and distribute the money according to your instructions.

Seeking Professional Guidance

Designating beneficiaries and splitting life insurance benefits can be a complex process. It is recommended to consult with a financial professional, attorney, or a licensed and reputable estate planning expert to ensure your intentions are accurately reflected and aligned with applicable laws and regulations.

Families can split life insurance benefits between individuals or between an individual and an irrevocable life insurance trust

When a family member passes away, the last thing you want is to be worrying about money. That's why it's important to have a plan in place for how life insurance benefits will be distributed among your loved ones. Here are some ways that families can split life insurance benefits:

Splitting Benefits Between Individuals

When designating beneficiaries, you can choose to have multiple primary beneficiaries who will each receive a portion of the death benefit. You can specify the percentage of the benefit that each individual will receive, as long as the percentages add up to 100%. This allows you to ensure that the benefit is distributed according to your wishes and the needs of your beneficiaries. It's important to regularly review and update your beneficiary designations to reflect any changes in your life, such as marriage, divorce, or the birth of a child.

Irrevocable Life Insurance Trusts (ILITs)

Another option for splitting life insurance benefits is through the use of an irrevocable life insurance trust (ILIT). An ILIT is a type of trust that holds one or more life insurance policies and is designed to help manage the distribution of benefits. Once an ILIT is created, it cannot be changed or undone, which allows the insured to have control over how the benefits are used. ILITs can help avoid estate taxes on insurance benefits and other assets, and they also provide protection from divorce, creditors, and legal action. When setting up an ILIT, it's important to seek professional advice to ensure that it is structured correctly and complies with legal requirements.

Combining Approaches

In some cases, you may want to combine these approaches by designating both individuals and an ILIT as beneficiaries. This can provide flexibility and ensure that your wishes are carried out. For example, you could designate a certain percentage of the benefit to be distributed to individuals, while the remaining percentage is placed in an ILIT for future use. This can be especially useful if you want to provide for minor children or loved ones with special needs who may not be able to manage a large sum of money on their own.

When it comes to splitting life insurance benefits, there is no one-size-fits-all approach. The best approach for your family will depend on your unique circumstances and goals. By understanding the options available, you can make informed decisions that will provide financial security for your loved ones.

Frequently asked questions