Life insurance has long been recognized as a helpful way to provide for your heirs and loved ones when you pass away. Naming your policy beneficiaries should be a relatively simple task. however, there are a number of situations that can easily lead to adverse and unforeseen consequences. Here are six pitfalls for life insurance beneficiaries you may want to avoid.
do not name a beneficiary
The most obvious mistake you can make is failing to name a beneficiary on your life insurance policy. but simply naming your spouse or child as beneficiary may not be enough. it is conceivable that you and your spouse will die together, or that your designated beneficiary will die before you. If your designated beneficiaries are not alive at the time of your death, the insurance company may pay the proceeds of death to your estate, which can lead to other potential problems.
death benefit paid to your estate
If your life insurance is paid out of your estate, a number of unwanted issues can arise. First, insurance proceeds are likely to be subject to probate, which can delay payment to your heirs. Second, the life insurance that is part of your estate is subject to claims from your estate creditors. Not only might your heirs have to wait to receive their portion of the insurance, but your creditors may first satisfy their claims with that proceeds. Naming primary, secondary, and ultimate beneficiaries can prevent proceeds from ultimately being paid to your estate. If the primary beneficiary dies before you, then secondary or alternate beneficiaries receive the proceeds. and if secondary beneficiaries are not available to receive the death benefit, you can name an ultimate beneficiary, such as a charity, to receive the insurance proceeds.
name a minor child as beneficiary
Unintended consequences may arise if your designated beneficiary is a minor. Insurance companies will rarely pay life insurance proceeds directly to a minor. Typically, the court appoints a guardian (a potentially costly and time-consuming process) to handle the proceeds until the minor beneficiary reaches the age of majority under state law. If you want the life insurance proceeds to be paid out for the benefit of a minor, you may want to consider creating a trust that names the minor as beneficiary. The trust then manages and pays the insurance proceeds according to the terms and conditions set forth in the trust document. consult with an estate attorney to decide on the course that best suits your situation.
by stock or per capita
It is not uncommon to name multiple beneficiaries to share life insurance proceeds. but what if one of the beneficiaries dies before you? Do you want the portion of the deceased beneficiary to be added to the shares of the surviving beneficiaries, or do you want the portion to pass to the children of the deceased beneficiary? that is the difference between per stirpes and per capita. You don’t have to use legal terms to say what will happen if a beneficiary predeceases you, but it is important to indicate on the insurance beneficiary designation form how you want the portion to pass if a beneficiary predeceases you. por stirpes (per branch) means that the share of a deceased beneficiary passes to the next generation in line. per capita (per head) states that the deceased beneficiary’s share is added to the shares of surviving beneficiaries so that each receives an equal share. disqualification of the recipient of government assistance
A beneficiary you name for your life insurance may be receiving or is eligible to receive government assistance due to a disability or other special circumstance. eligibility for government benefits is often tied to the beneficiary’s financial circumstances. The payment of insurance proceeds may be a financial windfall that disqualifies your beneficiary from eligibility for government benefits, or the proceeds may need to be paid to the government entity as reimbursement for benefits paid. Again, an estate attorney can help you address this issue. taxes
Life insurance death income is generally not taxable when paid. however, there are exceptions to this rule, and the most common situation involves having three different people as the owner, insured, and beneficiary of the policy. Typically, the policy owner and the insured are one in the same person. but sometimes the owner is neither the insured nor the beneficiary. For example, Mom may own Dad’s life policy for the benefit of her children. In this situation, Mom is effectively creating a gift of insurance proceeds to her children/beneficiaries. As a donor, the mother may be subject to gift tax. consult a financial or tax professional to determine the best way to structure the policy.