TABLE OF CONTENTS: What is Life Insurance? Why Life Insurance Matters in Your 20s-40s Locking in Lower Rates Protecting Your Loved Ones Covering Final Expenses Tax-Free Payouts The Cost of Life Insura...
Are you one of the 62% of Americans that has life insurance coverage? If you answered 'yes,' congratulations and job well done! You have taken a proactive step in securing the future of your loved ones in the event of your untimely death. Life insurance should be a part of everyone's financial plan.
Too often, when life insurance isn't present and an unexpected death occurs, the surviving family is left to make ends meet. That poses a good reason to ensure that your dependents—whether existent now or a future consideration—are taken care of with a life insurance policy. Someday, someone will be thankful that you did!
When it comes to naming the beneficiary or beneficiaries for your life insurance policy, make sure you check off these must-dos to ensure your life insurance proceeds are available to your family immediately and that there is no uncertainty about what you wanted for your loved ones.
1. Give detailed and specific information
To ensure that your wishes are carried out quickly and with no confusion, make sure to include detailed and specific information about the beneficiaries of your life insurance policy. You don’t want there to be any room for confusion or interpretation when it comes to handling the policy proceeds after you are gone.
Rather than naming your “spouse” or “children” as beneficiaries, make sure you document their full legal names and provide further identification information, such as addresses and social security numbers, if available. This will save time and hassle when it comes time for the life insurance company to find and pay your beneficiaries.
2. Always name a contingent beneficiary.
A primary beneficiary is the person or persons whom you want to receive your life insurance policy proceeds in the event of your death. The contingent, or secondary beneficiary is the person or people whom you would like to receive your life insurance death benefit in case your primary beneficiary predeceases you.
According to LifeHappens, “passing away and leaving behind life insurance without a living beneficiary could mean the payout goes to someone you never wanted your policy to benefit. It could also require a court-appointed administrator to sort things out.”
3. Pick trustworthy custodians and trustees
It is critical that you give careful consideration to choosing your custodians or trustees, because they will be responsible for the financial management of the policy proceeds for your beneficiaries.
A custodian is in charge of maintaining and protecting assets left to a minor through a life insurance policy. Until the minor legally becomes an adult at 18 or 21 (depending on the state), the custodian is responsible for using the policy proceeds in a manner that serves the best interests of the beneficiary.
Some people choose to set up a trust to hold life insurance policy proceeds for their beneficiaries. With a trust, you can specify how these assets are to be managed and used after you are gone. You then appoint a trustee to ensure that the trust is managed and distributed according to your wishes.
Related Reading: Estate Planning: A List of Must-Do’s
4. Review your beneficiary designations
Since the details of your life insurance policy are not something that most remember to check on a routine basis, it is a good idea to update or revise beneficiary information about once every year or two and after major life events such as getting married or divorced, having children, or losing a spouse.
Beneficiary information is extremely important because it takes priority over your will when it comes to certain items. For example, if you have a life insurance policy that has your now-estranged spouse named as the beneficiary, he/she will be the one to receive your death benefit when you pass away, even if your will says otherwise. That is why many estate planners will recommend that you review your beneficiaries every two years. Although it is easy to forget about, you must remember that updating and revising your beneficiaries now can save your heirs the headaches down the road when you are no longer around to provide your input.
5. Make sure your documentation is up to date
If you have an existing life insurance policy, you’ll want to make sure to keep those documents up to date. In the event that you die without updated versions of these documents on file, the uncertainty could breed conflict between your children, siblings, etc. and possibly end up in court. You will save your family a world of headaches by recording these decisions now.
6. Be aware of special situations
In most cases, the proceeds from life insurance benefits do not have to be reported as gross income. Life insurance can be a financially savvy way to maximize your beneficiary's benefit amount and can be a smart inheritance tool.
However, there are certain scenarios that could trigger a tax on the life insurance benefit. For example, if you have a life insurance policy with cash values and over the years you have borrowed against that cash value and there is an outstanding loan when you die, the amount of the loan in excess of the premiums you have paid on that policy may be subject to taxation within your estate.
Another tricky situation might arise in some states if you live in a community property with your spouse and don’t name your spouse as a beneficiary. It’s a good idea to speak with a life insurance agent to make sure your policy doesn’t run up against these uncommon situations.
While talking about death is never fun, now is the best time to make sure you have provided for your family's future needs. If you spend a few hours attending to these details now, you and your loved ones can enjoy the peace of mind that comes from knowing you're prepared for the unexpected.
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