Who is the beneficiary?

By Steven H. Kobrin, LUTCF
Copyright © Steven H. Kobrin, LUTCF.
All rights reserved.

Next to the insured, the beneficiary is the key player when planning to buy life insurance. After all, it is this person (or business or legal entity, as we shall see), that will receive the money when a claim is filed. Who should this person be? How will they get the money? Can that person be changed later on?

These are important questions. Listed below are some of the key items you need to know when making this decision. As always, you should remember that I am providing this information for educational purposes only. You should consult with a competent advisor when making a financial, legal or tax decision.

How does the beneficiary get paid?

Generally speaking, the survivor benefit goes directly to the beneficiary and not through your estate. This avoids probate. However, if your estate is named as the beneficiary of the policy, the proceeds will become part of your gross estate and possibly become subject to estate taxes.

Should I use a trust?

Attorneys and financial advisors that do estate planning like to bypass the estate tax exposure by establishing a trust. The trust will be the applicant, payer, owner, and beneficiary of the policy. This technique will keep the proceeds out of your estate, but does involve the tradeoff of control over your policy. For this reason you need to become educated about estate planning with a life insurance trust to get comfortable enough to make the tradeoff.

How do I handle minor children?

The welfare of minor children must always be a primary concern of life insurance planning. You need to arrange for the proceeds of the policy to be managed and supervised by a competent adult. If you don't, the court will appoint a guardian for your children. This can lead to additional cost and emotional strain that will burden everyone.

Many people will avoid this problem by appointing a trusted adult as the beneficiary. This person is charged with providing for the children. The proper use of a living trust, your will, and an adult custodian under your state's Uniform Transfers to Minors Act (UTMA) can all ensure that the money you leave to your children will be handled properly. As always, you need to speak with an estate planning attorney about this.

Can I change the beneficiary?

The beneficiary of your policy can be changed through a simple service form. Remember, it is the owner of the policy that has the power to do this; therefore, if your policy is owned by a trust, the trustee must get involved.

The beneficiary should be reviewed with every life change—marriage, divorce, birth of a child, or death of the beneficiary.

Do I need a "backup" beneficiary?

A contingent beneficiary can be named on your policy. It serves as a "backup" in case the primary beneficiary dies. This is especially important in cases where you and your primary beneficiary die near the same time.

If you have no contingent beneficiary and your primary beneficiary is deceased, the proceeds pass to your estate and can be subject to unnecessary taxes and fees. This issue is the key reason why people choose a contingent beneficiary.

Can I name a church, synagogue or other charity as the beneficiary?

Millions of Americans provide a substantial donation to their favorite charity through the gift of life insurance. State departments of insurance recognize that charities are dependent upon their donors and allow for life insurance to be placed on the lives of the donors for the benefit of these organizations.

It's a great way to spend a relatively small amount of money in the form of a premium, to secure a substantial donation to the religious, health, or communal group that is close to your heart.