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Beneficiary Designations

Life insurance is often one of the most important parts of an estate plan. People usually purchase life insurance to prevent their spouse, children, or other dependents from suffering financial hardship if they die unexpectedly.

You may think that all you need to do is simply write in the name of the person you would like to receive the proceeds from your life insurance policy on the beneficiary designation section of your paperwork and forget about it. However, there are several important factors you should consider first.

Consider Naming a Trust as the Beneficiary

Many people designate the person they would like to benefit as a direct beneficiary of their life insurance policy. If you want to provide funds for your spouse’s retirement, it may make sense to name him or her as the primary beneficiary. However, depending upon your particular circumstances, goals, and who you are trying to protect, it may be more prudent to name a trust as the beneficiary. For certain individuals, it will be more beneficial if the life insurance proceeds are distributed according to the terms you have established in your trust rather than having a large cash payment made directly to them.

Minor children. Life insurance companies will not pay death benefits to children under the age of 18 (or the age of majority in your particular state). As a result, if you name your child as a primary beneficiary, but die when your child is still a minor, a court-appointed guardian, who may or may not be someone you would have chosen, will likely be put in charge of managing the payout of the insurance proceeds for your child’s benefit. The proceeds may not be managed in the way you would have chosen.  In addition, any remaining proceeds will likely go directly into their pockets when your child becomes a legal adult--whether they are mature enough to handle such a windfall. This can be avoided if a trust is named as the primary beneficiary of the life insurance policy, with your child as a beneficiary of the trust. Then, the life insurance proceeds will be managed by the person you have chosen as the trustee and will be distributed to your child according to your wishes.

Some people may also mistakenly designate the child’s caretaker as the primary beneficiary to avoid the appointment of a guardian. However, this does not guarantee that the funds will actually be used for the child’s benefit, and the proceeds are vulnerable to claims made by the caretaker’s creditors. These problems can be avoided by designating a trust as the primary beneficiary and naming someone you trust as the trustee of that trust.

Recipients of government benefits. Although your intentions may be good, naming someone who is receiving need-based government benefits as a primary beneficiary of your life insurance policy may cause them to lose their eligibility for those benefits. A special needs trust can be created and named as the primary beneficiary of your life insurance policy. In that way, the insurance proceeds will be managed and distributed in a manner that will not compromise the government benefits, but will instead supplement them.