From Our “Ask a Question” mailbag: “Who is the Best Beneficiary Choices for My Life Insurance?”
Most recently updated on June 5th, 2018.
“I am a Delaware County resident and am planning to buy a large life insurance policy. But Who is the Best Beneficiary Choices for My Life Insurance?”
Who is the Best Beneficiary Choices for My Life Insurance?
If you have life insurance, you likely have determined that if you die there is a financial need that must be addressed by your absence. Because of this determination, you pay a small amount each year in premium to the life insurance company for the guarantee that if you die a more substantial sum of money is delivered to the named beneficiary.
But who is the best beneficiary?
The Most Popular Choice May Not be the Best Choice.
The most popular choice for a beneficiary is the person whom you feel will need the money from the life insurance. The person in need might be your spouse, child or another family member. In many cases, this person is NOT the person who should be named the beneficiary. There are some often-overlooked subtleties when naming a beneficiary.
For example, if you name a specific person as beneficiary, then at your death, that person must submit your death certificate to the life insurance company, complete various forms, then collect the insurance funds and deposit them into an account. These steps are relatively straightforward for your spouse, but a common mistake is to name underage children as contingent beneficiaries.
Careful if a Beneficiary is a Minor!
Minor children cannot legally complete the required paperwork. Further, they might be too young to collect the death certificate or open a bank account. If a minor is named as the beneficiary in Delaware County, a petition must be submitted to the Delaware County Orphans’ Court to have a guardian appointed to collect the insurance funds and then manage the funds until the child reaches age 18.
A much better course of action is to form a trust to hold the insurance funds for your underage children. You have several options including an irrevocable life insurance trust, created during your lifetime, or a dynasty trust, which is formed by the terms of your will. A skilled estate-planning attorney familiar with Delaware County planning can work with you to determine which trust best fits your circumstances.
Responsible, Creditor and Divorce Free Adults Can be Good Beneficiaries.
But what if the beneficiary might get divorced, sued or have debts?
Even if your beneficiary is an adult, naming a trust as a beneficiary might be the best idea. For example, if you name your spouse as beneficiary of your life insurance and your spouse accepts the life insurance proceeds without a trust, those proceeds are then available to your spouse’s creditors. Further, they are also available to your spouse’s next husband or wife. Instead, form an irrevocable life insurance trust. The trust owns the life insurance policy. At your death, the insurance pours into the trust, not to your spouse. The trust can provide shelter from creditors.
Another possibility is keeping the life insurance in your name, naming your spouse as the primary beneficiary. But, you then name “My Estate” as contingent beneficiary. Now you are relying on your spouse to perform some legal and asset protection analysis at your death.
If your spouse believes it is safe to have the life insurance in his or her name, then the spouse will accept the life insurance. They have this right as the primary beneficiary. If your spouse feels more comfortable with the funds sheltered in trust, your spouse will disclaim. Which means the funds go to the contingent beneficiary, which is your estate. In your testamentary trust will you then form a disclaimer trust for your spouse. The disclaimed life insurance pour into this trust where it is available for your spouse. But, even though available, the trust provides some shelter from creditors and future spouses.
More Planning Questions?
If you have more estate planning questions, please read my more detailed article, Estate Planning, Everything You Need to Know.
In Conclusion: Who Needs an Estate Plan.
So who is the best beneficiary of your life insurance policy? The best beneficiary will depend on your circumstances, but be aware that many options do exist. Your best choice is to consult with a trusts and estates attorney familiar with the rules applicable to Delaware County. An experienced attorney can walk you through the options and clarify their pros and cons.
In this article, I tried to answer the question, Who is the Best Beneficiary Choice for My Life Insurance. Further, I included links to even more detailed information on my website. So, let me know how I did, comments and questions are welcome! I hope it helped!
If you have more questions about wills and estate planning, let our Delaware County Estate Planning Lawyers help walk you through the confusing process. Our lawyers are ready to answer your questions. Feel free to contact our office for a free consultation.
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