Divvying Up Life Insurance: 3-Way Split Strategy

When it comes to dividing life insurance between three people, the process is relatively straightforward. You can choose to allocate specific percentages of the death benefit to each individual, ensuring the total adds up to 100%. For instance, you could opt for a 50-25-25 split or a 60-20-20 split, depending on your preferences and circumstances. This approach ensures that each beneficiary receives a predetermined share of the payout.

It is also essential to designate primary and contingent beneficiaries. Primary beneficiaries are the first in line to receive the death benefit, while contingent beneficiaries are secondary and will only receive the payout if the primary beneficiary is unable to accept it. In the context of dividing the benefit between three people, you could have one primary beneficiary receiving 50% and two contingent beneficiaries each receiving 25%.

Additionally, it is worth noting that you can change, add, or remove revocable beneficiaries at any time. However, for irrevocable beneficiaries, you would need the beneficiary's approval to make any changes.

Understanding primary, secondary and tertiary beneficiaries

When you take out a life insurance policy, you will need to designate a beneficiary or beneficiaries—the person or people who will receive the benefit of your policy after your death. You can choose to allocate the death benefit among several beneficiaries, and you can define what proportion of the benefit each individual will receive.

Understanding Primary, Secondary, and Tertiary Beneficiaries

Primary Beneficiaries

Primary beneficiaries are first in line to receive the death benefit from a life insurance policy. They are the main beneficiaries of the insurance policy and are chosen to receive the death benefit first. It is important to note that you can name more than one primary beneficiary on your policy. For example, if you have two younger siblings, you might name both as primary beneficiaries.

Secondary Beneficiaries

Also known as contingent beneficiaries, secondary beneficiaries are next in line to receive the proceeds of your policy should the primary beneficiary be unable to do so. They will only receive a payout if the primary beneficiary is deceased or cannot accept the benefit for some reason. For example, if you name your spouse as a primary beneficiary and they pass away before you, your children, as secondary beneficiaries, will receive the payout.

Tertiary Beneficiaries

A tertiary beneficiary is the next in line to receive the life insurance policy proceeds in the event that both the primary and secondary beneficiaries are unable to do so. While most life insurance policies have primary and secondary beneficiaries, very few include tertiary beneficiaries. If you wish to name a tertiary beneficiary, you must ensure they are designated as such in your policy.

Choosing Your Beneficiaries

When choosing your life insurance beneficiaries, it is important to consider where those funds would have the greatest impact in the event of your death. You can choose anyone as a beneficiary, including a spouse, children, parents, siblings, close friends, or a charitable organisation.

You can also decide how much of the payout each party will receive. For example, you might want to divide the payout equally or choose a specific percentage for each beneficiary. It is important to regularly review and update your beneficiary designations to reflect any changes in your life.

How to split proceeds between multiple beneficiaries

When it comes to splitting proceeds between multiple beneficiaries, there are a few things to consider. Firstly, it is important to understand the different types of beneficiaries. Primary beneficiaries are the first in line to receive the life insurance death benefit, while contingent or secondary beneficiaries only receive a payout if the primary beneficiary is unable to do so. You can also have tertiary beneficiaries, who are essentially back-ups if both the primary and secondary beneficiaries are unable to receive the death benefit.

When there are multiple beneficiaries, you can choose how to split the proceeds. You can either divide it equally among the beneficiaries or assign specific percentages to each beneficiary, ensuring that the total adds up to 100%. It is also possible to mix these strategies, for example, by allocating a certain percentage to one beneficiary and splitting the rest equally between the others.

In some cases, you may want to leave a larger portion of the proceeds to certain beneficiaries, such as a spouse or dependent children. You can also choose to leave a small portion to a charitable organization or a friend. Additionally, if you have minor children, you may need to set up a trust or appoint a legal guardian to manage the funds on their behalf.

It is important to review and update your beneficiary designations regularly, especially after major life changes such as marriage, divorce, or the birth of a child. This ensures that your wishes are up to date and accurately reflected in your life insurance policy.

• Spouse – 50%, Child 1 – 25%, Child 2 – 25%
• Spouse – 70%, Parents or Children – 30%
• Multiple children – equal split between each child

Irrevocable vs revocable beneficiaries

When taking out a life insurance policy, you can choose to make your beneficiary designation revocable or irrevocable. Here's what you need to know about the differences between the two:

Revocable Beneficiaries

A revocable beneficiary offers flexibility, allowing you to make changes at any time without needing the beneficiary's approval. This adaptability is beneficial when your circumstances change, such as after a marriage, divorce, or the birth of a child. The person or entity you choose as a revocable beneficiary has no legal interest in the death benefit during your lifetime, and you, as the policy owner, are in total control.

Irrevocable Beneficiaries

An irrevocable beneficiary designation provides a layer of certainty but at the cost of flexibility. Once you designate someone as an irrevocable beneficiary, you cannot make any changes without their written consent. This type of beneficiary is chosen in cases involving alimony or child support agreements, where the beneficiary's financial security needs to be guaranteed. Irrevocable beneficiaries are also common in divorce agreements to ensure that an ex-spouse cannot be removed from the policy without their consent.

Advantages of Irrevocable Beneficiaries

Irrevocable beneficiaries can be particularly useful in cases of divorce, second marriages, and blended families. For example, if you want to ensure that the death benefit goes to your biological children instead of a spouse or step-children, naming irrevocable beneficiaries may be a good option. Irrevocable beneficiaries can also be used with irrevocable trusts, ensuring that the trust beneficiaries receive the life insurance proceeds.

Disadvantages of Irrevocable Beneficiaries

If the irrevocable beneficiary's financial situation changes, you cannot redirect the funds to someone else without their written consent. This lack of flexibility could lead to less optimal tax outcomes for the new beneficiary.

Choosing Between Revocable and Irrevocable Beneficiaries

The choice between revocable and irrevocable beneficiaries may have tax implications. Designating someone as an irrevocable beneficiary can influence the estate's tax liability. In some cases, an irrevocable beneficiary may be considered a gift recipient under tax laws, potentially subjecting the value of the insurance policy to gift taxes. On the other hand, the irrevocable status can sometimes remove the death benefit from your taxable estate, which could be advantageous for estate tax planning.

Tips for Choosing and Updating Beneficiaries

• Be specific: Use the full name and provide additional identifying information to eliminate confusion.
• Include necessary information: Provide the beneficiary's full legal name, relationship to you, Social Security number or Tax ID, contact information, and date of birth.
• Update regularly: Review and update your beneficiary designations after major life events to ensure your policy reflects your current intentions.
• Consult professionals: Consult legal and tax professionals to understand the potential outcomes of your choices.

Splitting the Payout Between Multiple Beneficiaries

You can choose to split the life insurance payout equally between multiple beneficiaries or divide it by a certain percentage. You can change how the payout is split at any time. If you have multiple primary beneficiaries and one dies, the surviving beneficiary will typically receive the full death benefit unless the policy specifies a "per stirpes" distribution, which means the benefit will pass along a family lineage.

Final Thoughts

The right choice between revocable and irrevocable beneficiaries depends on your specific circumstances and priorities. Consider seeking advice from a financial or estate planning professional to make an informed decision that aligns with your goals and needs.

Naming children as beneficiaries

While it is possible to name your children as beneficiaries, it is not recommended to name minor children as the primary beneficiary. Minors cannot be paid the death benefit directly and the process of appointing a custodian can take several months, during which time your child will not be able to receive the financial support you intended for them. Instead, it is better to stick with an adult beneficiary or set up a trust for your child.

If you name your children as beneficiaries, you will also need to appoint an adult guardian for them in your will or use a trust. The guardian will be responsible for managing the funds from the payout and can use the money for state-approved expenses, like education for your child. Most states will allow your child to access the money when they reach the age of majority (18 in every state except Alabama and Nebraska, where it is 19, and Mississippi, where it is 21).

Another common solution is to create a trust and name the trust as the beneficiary. You can appoint a trustee to manage the death benefit and any other money in the trust according to your directions. You could designate funds for specific purposes, such as education or a car, and dictate that the funds are held until the child reaches a certain age.

If you do decide to name your minor children as beneficiaries, be sure to include their full legal names, Social Security numbers, dates of birth and addresses, so the insurer can locate them quickly.

Naming your estate as your beneficiary

Naming your estate as your life insurance beneficiary means that the proceeds from your policy will be distributed with your other assets according to your will. However, this approach has several disadvantages.

Firstly, in many states, life insurance proceeds are exempt from the claims of creditors when there is a named beneficiary, but not when your estate is the named beneficiary. By naming your estate as the beneficiary, you open up the opportunity for creditors to collect from those proceeds to satisfy their claims. That means your life insurance proceeds could be used to pay off any outstanding debts you may have at the time of your death before distribution to your beneficiaries.

Secondly, naming your estate as the beneficiary may result in a lengthy probate process, during which a court oversees the distribution of your assets. This can delay the disbursement of the death benefit to your loved ones and also increase the estate's tax liability.

Thirdly, if you have not named any beneficiaries, the proceeds will pass to your estate at your death and will be subject to probate and all the expenses and delays associated with settling an estate. In contrast, named beneficiaries receive proceeds almost immediately after your death, bypassing probate.

Therefore, it is crucial to review and update your life insurance policy's beneficiary designation to avoid any unintended consequences.

Frequently asked questions