At some point in your life there’s a good chance you are going to need life insurance and will need to decide who the beneficiary will be in the event the policy is used. You may have a life insurance policy as a benefit through your job, or you may buy one of your own. Either way, and no matter what type of policy you purchase, you need to carefully consider who to name as your beneficiary. This is the person who will receive your insurance benefit or savings when you die.
Marriage and Divorce
First, federal law dictates that your spouse will automatically become the beneficiary of your 401(k), pension, and retirement plans if you pass away. It is to your benefit to specifically name your spouse and if you want to name someone other than your husband or wife, you will have to ask your spouse to sign a waiver. With life insurance policies, such as whole, term or universal life, you can elect who you want as the beneficiary.
If you divorce, make sure you change your beneficiary once the divorce has been finalized. If you separate and never actually divorce, your legal spouse is still your beneficiary, even if you’ve been living apart or with someone else for decades.
Naming Children as Beneficiaries
It’s great to name your children as beneficiaries but if they are minors you may need to consider the legal red tape. If you die, the court may not give money directly to a minor. This means you’ll need to also make sure there is a guardian or trustee you can trust to either handle things on behalf of your children or be the beneficiary who will then invest the money as you wish.
If you don’t feel comfortable naming an alternate beneficiary, consult an attorney about setting up a trust for your children. You can set parameters and control the flow of their inheritance for both minors and even older children, who are not yet responsible enough to inherit and have use of a large sum of money.
Your Beneficiary and Your Will
Having a will does not mean that the same person or people will benefit from your life insurance. You can give all of your life insurance to someone who isn’t even listed in your will and it will never become a part of your estate. Your spouse, children, parents, siblings, domestic partners, or even friends or trusted allies could end up as your beneficiary. The choice is yours alone.
Naming Your Estate
You can name your estate as your beneficiary, to include it under the assets your estate handles according to your will. There are some drawbacks to this, though. For example, if you die with debt the money from your life insurance will become fair game to your collectors. If you name a beneficiary directly, there is no way for a creditor to get to that cash. You ultimately end up distributing less money to your heirs than if you had simply named them on the life insurance policy.
Naming beneficiaries can be tricky business. Make sure you talk to your insurance professional, your lawyer, and your financial advisor about your unique situation. They will help you to make plans and decisions that will put your hard-earned money to the best and most advantageous use.