5 Things to Consider When Naming Life Insurance Beneficiaries

You’ve gone so far as to get life insurance and you’re going to name your spouse and your kids as the beneficiaries. Check that off the list, right?

Not so fast…. There are several things to be aware of and consider when making these important decisions.

One of the greatest benefits of life insurance is it will help your family out immensely if you are no longer there to contribute to the household finances. It can mean your family won’t have to struggle or wait if something unexpected happens to you. Life insurance is paid out directly to the named beneficiaries; if you name your estate or you fail to name anyone, then the payment will be made to your estate. And that means it gets tied up in probate court for months, possibly years, until it gets distributed the way the court says it should. And that may not be the way you wanted it.

If you name beneficiaries properly, then the money will go where you want it when the time comes. No waiting for probate court timeframes, no uncertainty about who takes under your will or according to state law if you don’t have one.

There are several things to consider, though, when naming beneficiaries. And many pitfalls to be had if it is not done thoroughly, thoughtfully, and completely. Here are 5 things everyone should consider when designating life insurance beneficiaries:

1) Why are you leaving life insurance behind?

Getting clear on why you bought life insurance is a great place to start. Is it to pay off a mortgage? Pay for education? Ensure that your spouse can sustain the same lifestyle you enjoy together now? The amount you need and the beneficiaries you designate may change over time. Being clear on your why can not only ensure you name the right beneficiaries, but it can also help you make sure you have the most appropriate type of policy and amount of coverage in place.

Possible beneficiaries may include:

· Your spouse

· Your children

· Other family

· A trust

· A charity

Or any combination of the above. It all depends on what you want. What your why is.

2) Are any of the beneficiaries minors?

If any beneficiary is a minor, keep in mind that someone who is 18 or over will need to be in charge of the money. It may be a parent, it could end up being someone else. If you do not have a clear plan in place that establishes who will manage the finances for your minor children, a probate judge will decide. And that person will have to account to the probate court every year for every penny spent. Not to mention when the minor turns 18, s/he will get all of the money that’s left over. And that may be plenty of money. That the 18 year old gets to do with however they please.

How many 18 year olds do you know that make good decisions with lots of money?

3) Have you named enough beneficiaries? What happens if you don’t?

Time and time again people name a spouse as the beneficiary and that’s that. What happens if your spouse predeceases you, or worst case scenario, dies at the same time you do? If you haven’t named beneficiaries other than your spouse then your life insurance will pass to your estate. And you know what that means… it will be tied up for months or possibly years in the probate process. It also means your family will be paying fees to get through probate for an asset that easily could have passed to the right people without all that hassle and delay.

4) What if your spouse re-marries?

This can be a tricky conversation to have, but if you have children and you are leaving life insurance to take care of your spouse and your children, you may want to think carefully about where the money goes. If it goes directly to your spouse and s/he remarries, the new spouse may end up with a good chunk or even all of the money that was supposed to be there for your kids. That doesn’t mean your spouse is a bad person, it just means that this issue was overlooked. It happens. A lot. A properly drafted trust is an easy way to avoid this situation.

5) Will the life insurance you leave behind create unintended consequences?

As discussed above, 18 year olds (or those not far past the age of 18) may not always make great money decisions. There are studies that suggest human brains do not fully develop good decision making function until typically the age of 26. Leaving a large sum of money to someone in that age bracket may not only lead to irresponsible choices, it could create even greater problems, such as:

· Attracting unscrupulous people into their lives;

· Bad money decisions early on may lead to a lifetime of frustration and feelings of failure;

· Developing a reliance on spending money not earned could impact future earning ability and success; and

· For someone who is eligible for benefits due to a disability, leaving a large sum of money outside of a specially designed trust could cause them to lose that eligibility, which creates all sorts of undesirable consequences.

There are ways to address every single one of these potential pitfalls. Working through these issues is just one of the benefits of working with an estate planning lawyer to develop an estate plan, rather than going it alone, using online DIY, or choosing to use with a lawyer who doesn’t spend much time doing this work. We would love to talk with you about these, and all the other issues that comprehensive estate planning covers. Schedule an appointment here to get yourself moving forward toward creating a plan that will work when your family needs it the most. We look forward to seeing you.