I think that the beneficiary status on a life insurance policy is an often over looked when handling one’s finances and estate planning, however, for many it is the largest asset they leave behind for their heirs and should be handled with care. As with everything on this site, I am not providing legal or financial advice, but rather, giving you some thoughts that you can bring to your professional (be it legal or insurance).
Lets say you are in the majority of people and do not have your life insurance owned by a trust (often referred to as an ILIT) does this mean you are stuck giving your surviving spouse or children a boat load of cash outright? No.
In most cases a life insurance contract will name a surviving spouse and then children as contingent beneficiary. It feels very natural, and probably works in the majority of cases but doesn’t mean it has to be your distribution schedule.
Alternative Life Insurance Beneficiary Statuses
In most cases, your testament intent should be the primary concern when naming a life insurance beneficiary, and while the standard (Surviving Spouse and then children) works for most, it may not work for you. Like almost anything regarding personal finance, estate planning and insurance planning the ideas below are going to have pros and cons:
- Naming your estate as beneficiary – Maybe you have a simple or complex trust design in your estate, why are we going to recreate the wheel lets just send the life insurance through that flow. The problem is that this would then make life insurance a probate asset, but depending on the state you live in that isn’t really the biggest of deals as compared to getting the benefit of your trusts.
- Naming a dormant inter vivos Trust – So you don’t have your assets owned by an Irrevocable Life Insurance Trust, does this mean you can’t have the death benefit owned by a trust? No. You could name a dormant inter vivos trust (Trust created during life).
- 3rd Party Special Needs Trust – Building off the previous idea, many parents of children with special needs do not know that they should 100000% not name their children as beneficiary. Doing so could leave their government benefits at risk (not to mention the other risk with giving someone with diminished capacity a large chunk of cash).
- Charitable – Often over looked but leaving your life insurance policy to charity may be your testamentary intent. You could do this in a few ways, some easy (i.e. just name the charity of your choice as bene) or it can get complicated really fast (Charitable Remainder or Lead Trusts).
- Naming Me – Way too often looked but Evan would love to be your beneficiary.
While technically an alternative plan there is one design I often see which is a terrible idea – Naming Person X who is going to take care of it for X, Y and Z. What if person X was involved in a divorce or law suit? Terrible Idea.
Did you give much thought to your life insurance beneficiary?
