Who Can I Name as a Beneficiary on My Life Insurance Policy? | California Benefits Advisors

First off, great job on buy­ing life insur­ance! You took an impor­tant step by pro­tect­ing the ones you love.

Every life insur­ance pol­i­cy requires you to name a ben­e­fi­cia­ry. A life insur­ance ben­e­fi­cia­ry is typ­i­cal­ly the per­son or peo­ple who get the pay­out on your life insur­ance pol­i­cy after you die; it may also be a trust, char­i­ty or your estate.

You can also name more than one ben­e­fi­cia­ry, as well as the per­cent­age of the pay­out you want to go to each one—for instance, you could des­ig­nate 50% to a spouse and 50% to an adult child.

You’ll typ­i­cal­ly be asked to pick two kinds of ben­e­fi­cia­ries: a pri­ma­ry and a sec­ondary. The sec­ondary ben­e­fi­cia­ry (also called a “con­tin­gent ben­e­fi­cia­ry”) receives the pay­out if the pri­ma­ry ben­e­fi­cia­ry is deceased.

Pro­vid­ing for Kids
A big rea­son why peo­ple buy life insur­ance is to pro­vide for chil­dren left behind. Usu­al­ly this is done by mak­ing the sur­viv­ing spouse or part­ner who cares for and is rais­ing the kids the ben­e­fi­cia­ry. But what if you’re wid­owed or—God forbid—-both you and your part­ner pass away at the same time?

First, know that it’s not a good idea to name a minor as a ben­e­fi­cia­ry. That’s because the law for­bids life insur­ance pay­outs to any­one who has not reached the age of major­i­ty, which is 18 to 21 depend­ing on your state. If a child were to be named, then it would be turned over to pro­bate court. The court will name a guardian who has over­sight of the money/estate until the child comes of age.

For­tu­nate­ly, there are two options. The first is to name an adult cus­to­di­an. The cus­to­di­an should be some­one you can trust to use the mon­ey for things like hous­ing, health care, and edu­ca­tion until the child reach­es the age of major­i­ty. At that point, any remain­ing mon­ey gets turned over the child and they can spend it any way they want.

The sec­ond option is to work with an attor­ney to set up a trust. In this sce­nario, the trust is the ben­e­fi­cia­ry and a trustee is named to man­age and dis­trib­ute the funds. The main advan­tage of a trust over nam­ing a cus­to­di­an is hav­ing more control.

A trust lets you spec­i­fy how you want the mon­ey distributed—and it lets you do so even when your kids are adults. (One quick word of cau­tion: Def­i­nite­ly con­sult with an attor­ney if you’re set­ting up a trust for a spe­cial needs child. They can help you cre­ate one that doesn’t impact your child’s eli­gi­bil­i­ty for gov­ern­ment assis­tance like Med­ic­aid or Sup­ple­men­tal Secu­ri­ty Income.)

Nam­ing a Charity
Do you have a cause that’s near and dear to your heart? If so, you might con­sid­er nam­ing a char­i­ta­ble orga­ni­za­tion as the ben­e­fi­cia­ry of your life insur­ance.

There are sev­er­al ways to do this. They include nam­ing the char­i­ty as a ben­e­fi­cia­ry on a new or exist­ing life insur­ance pol­i­cy, mak­ing the char­i­ty both the own­er and the ben­e­fi­cia­ry of a life insur­ance pol­i­cy, adding a char­i­ta­ble-giv­ing rid­er to a life insur­ance pol­i­cy, or work­ing with a com­mu­ni­ty foun­da­tion to fig­ure out the best way to dis­trib­ute a payout.

Final Tips
Think care­ful­ly about nam­ing your estate as a ben­e­fi­cia­ry. This can trig­ger a long and cost­ly legal process known as pro­bate. A faster and more effi­cient solu­tion is to name spe­cif­ic indi­vid­u­als or orga­ni­za­tions as beneficiaries.

1. Get spe­cif­ic. Instead of nam­ing “my spouse” or “my chil­dren” as ben­e­fi­cia­ries, list their names along with their address­es and Social Secu­ri­ty num­bers. This saves a lot of time since the insur­ance com­pa­ny doesn’t have to track down information.

2. Always name a con­tin­gent ben­e­fi­cia­ry. Pass­ing away and leav­ing behind life insur­ance with­out a liv­ing ben­e­fi­cia­ry could mean the pay­out goes to some­one you nev­er want­ed your pol­i­cy to ben­e­fit. It could also require a court-appoint­ed admin­is­tra­tor to sort things out.

3. Pick trust­wor­thy cus­to­di­ans and trustees. Real­ly con­sid­er who’d you trust your child’s finan­cial well-being with if you weren’t in the pic­ture. Your kids may love their uncle or aunt, but is he or she mature and respon­si­ble with mon­ey? If not, pick some­one else who is.

4. Reg­u­lar­ly review your ben­e­fi­cia­ries. It’s a good idea to review your ben­e­fi­cia­ries about once a year and after major life events like a mar­riage, divorce, the birth of a child, or a death in the family.

5. Com­mu­ni­cate your wish­es. Let your ben­e­fi­cia­ries know your inten­tions and how to find the policy.

6. Be aware of spe­cial sit­u­a­tions. There are some sit­u­a­tions that could trig­ger a tax on the life insur­ance benefit—for instance, when the pol­i­cy­hold­er and the insured aren’t the same per­son. Like­wise, things can get sticky if you live in a com­mu­ni­ty prop­er­ty state and don’t name your spouse as a ben­e­fi­cia­ry. An insur­ance agent can give you life insur­ance advice on this and much more.

 

By Aman­da Austin

Orig­i­nal­ly post­ed on lifehappens.org

2017 Employee Benefits Adviser Rising Stars NBBJ Gives Awards Winner Email Badge NBBJ Community Philanthropy Award 2017-2022
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