Life Insurance: Dividing The Pie Of Protection

When it comes to dividing life insurance, there are a few different ways to do so. The most common methods are per stirpes and per capita. Per stirpes means that the payout is divided by rank in the family, while per capita means that the payout is divided by the number of people. For example, if you have two children and you choose to divide your life insurance per stirpes, each child will receive 50% of the payout. If one of your children predeceases you, their share will be passed on to their children, while the other 50% will be inherited by your living child. On the other hand, if you choose to divide your life insurance per capita and you have five living descendants, each will receive an equal share of 20%. If one of them predeceases you, the remaining four will each receive 25%. Another option is to set up a life insurance trust, where you can designate a trustworthy estate-planning attorney to oversee the trust. It's important to carefully consider how you want your life insurance to be divided and to seek professional help if needed to ensure that your wishes are carried out.

Per stirpes vs per capita

Per stirpes and per capita are terms used to describe how life insurance proceeds are distributed to beneficiaries. The distribution method chosen will depend on the policyholder's preferences, their family situation, and how they want the money to be divided among their loved ones.

Per capita, meaning "by the head" in Latin, is the default option for life insurance policies. It involves dividing the death benefit equally among all living beneficiaries. For instance, if there are three beneficiaries, each will receive a third of the payout. If one beneficiary passes away before the policyholder, their share will be split among the remaining beneficiaries.

Per stirpes, on the other hand, means "by branch" or "by root" in Latin. This option ensures that the death benefit is passed on to a beneficiary's heirs if that beneficiary dies before the policyholder. In such cases, the beneficiary's portion of the death benefit will be distributed to their children, grandchildren, or great-grandchildren. This arrangement does not affect the inheritance shares of other beneficiaries named in the will or policy.

For example, consider a scenario where a policyholder has two adult children, and each child has two children of their own. If the policyholder chooses a per capita distribution, and one of their children passes away before them, the death benefit will be split evenly between the deceased child's sibling and the policyholder. However, if the policyholder chooses a per stirpes distribution, the death benefit will be distributed among the deceased child's children, rather than between the remaining beneficiaries.

It is important to carefully consider the distribution method when designating beneficiaries in a life insurance policy. Consulting with a financial advisor or estate planning attorney can help ensure that the policyholder's wishes are accurately reflected and that their legacy is passed on as intended.

Primary, secondary, and tertiary beneficiaries

When you take out a life insurance policy, you will be asked to name a primary beneficiary. This is the person or organisation that will receive the proceeds from your life insurance after you die.

You can also name secondary and tertiary beneficiaries, or those who are first, second, and third in line to receive the money. This is important because it ensures your life insurance payout is used as you intended.

Primary Beneficiaries

The primary beneficiary is the person or entity that is chosen to receive the death benefit first. It is possible to name more than one primary beneficiary on your policy. For example, if you have two primary beneficiaries, you could designate a 60/40 split or any other combination.

Secondary Beneficiaries

The secondary beneficiary (also known as the contingent beneficiary) would be the next in line to receive the proceeds of your policy should the primary beneficiary be unable to do so. For example, if your primary beneficiary passes away before you do, the secondary beneficiary will receive the payout.

Tertiary Beneficiaries

The tertiary beneficiary is the next person or entity in line to receive the proceeds of your life insurance policy. They will receive the payout if both the primary and secondary beneficiaries are unable to do so.

Irrevocable vs revocable beneficiaries

When setting up a life insurance policy, you can choose who will receive the payout, known as the death benefit, when you pass away. This person is called a beneficiary. There are two types of beneficiaries: revocable and irrevocable. This article will explain the differences between the two and the implications of choosing one over the other.

Revocable Beneficiaries

A revocable beneficiary is a more flexible option. The policy owner can change the beneficiary on their policy without restriction. The policy owner simply submits a request to the insurance company and does not need to notify or ask the current beneficiaries for permission. Revocable beneficiaries are the default option and are more common than irrevocable beneficiaries. This is because your choice of beneficiary may change over time as your life circumstances change.

Irrevocable Beneficiaries

An irrevocable beneficiary is a person or entity designated to receive the assets in your life insurance policy and cannot be changed or removed without their consent. The beneficiary can choose to allow the change but is not required to do so. Therefore, choosing an irrevocable beneficiary should be considered a permanent arrangement. An irrevocable beneficiary has a guaranteed right to receive the death benefit from your life insurance policy, and their consent is required for any changes that affect their rights.

When to Choose an Irrevocable Beneficiary

Irrevocable beneficiaries are often used in cases where financial security must be guaranteed, such as in loan agreements or divorce settlements, to ensure the beneficiary's rights are protected. They are also commonly used when life insurance is used as collateral for a loan. In this case, the lender may be named as the irrevocable beneficiary until the loan is paid off. This ensures that if the borrower passes away before the debt is settled, the lender will receive the insurance payout to cover the remaining balance.

Advantages and Disadvantages of Irrevocable Beneficiaries

The main advantage of naming an irrevocable beneficiary is that it ensures the money goes to the person or entity you intended. It is also a good option for those who want to protect their beneficiaries from being cut off or challenged by a stepparent or ex-spouse. However, the primary disadvantage is that it offers less flexibility. Once you name an irrevocable beneficiary, you cannot make changes without their consent.

Naming minors as beneficiaries

Legal Guardian or Custodian

In most states, a minor cannot directly receive the life insurance benefit. If you pass away before your child reaches the legal age of majority (typically 18 or 21), the insurance payout will be sent to the legal guardian or custodian of the minor's estate. This person will be responsible for managing the funds on behalf of the minor until they come of age. It is important to appoint a guardian or custodian in your will to avoid the probate court appointing someone else for you.

Trust as Beneficiary

Another option is to set up a trust and name it as the beneficiary of your life insurance policy. A revocable trust, also known as a living trust, allows you to adjust the assets and beneficiaries over time. Alternatively, an irrevocable trust provides more certainty but less flexibility, as it cannot be changed without the beneficiary's consent. Consult a financial advisor to determine which type of trust is best for your situation.

Uniform Transfers to Minors Act (UTMA)

If you live in a state that has adopted the UTMA, you can create a "custodial account" that holds the insurance payout for the minor until they reach the legal age of consent. This option may simplify the process and reduce costs compared to appointing a guardian or setting up a trust.

Detailed Information

When naming minors as beneficiaries, it is crucial to provide detailed information to ensure a smooth transfer of benefits. Include the minor's full legal name, Social Security number or Tax ID, date of birth, address, and relationship to you. Consult a legal professional to ensure you are complying with all relevant laws and regulations.

Naming your estate as your beneficiary

Probate and Creditors

If you name your estate as your beneficiary, the death benefit will likely be held up in probate court, which can delay the payout and cost your estate money. This delay could be lengthy, and, in the meantime, your estate and assets will be assessed by a judge to determine what debts you owe. This means that creditors will have access to your life insurance death benefit, and your loved ones could receive less money.

Estate Tax

Although life insurance proceeds are typically not taxable, if they are left as part of a large inheritance, the payout may be subject to estate tax.

Alternatives

It is generally better to name specific beneficiaries on your life insurance policy. This ensures that the funds go directly to your beneficiaries without being wrapped up in your estate. You can name multiple beneficiaries and choose how much of the payout each party receives.

If you want to leave money to minor children, you can set up a trust and name the trust as the beneficiary. This way, the trustee can oversee the funds and distribute the money according to your wishes.

Frequently asked questions