Every insurance policy requires you to name a beneficiary. A beneficiary in the broadest sense is a natural person or other legal entity who receives money or other benefits from a benefactor. For example, the beneficiary of a life insurance policy is the person who receives the payment of the amount of insurance after the death of the insured. It can also be a trust, charity, or estate. You can name more than one beneficiary. You can designate 50% to a spouse and 50% to an adult child. You will typically be asked to pick two kinds of beneficiaries, a primary, and a secondary. The primary beneficiary is the first in line to receive the policy death benefit. A secondary beneficiary is the second beneficiary in line to receive the policy death benefit.
Providing for Children
Law forbids life insurance payouts to anyone who has not reached the age of majority, which is 18 or 21 depending on the state. That is the reason it is not good to name a child as your beneficiary. Most parents buy life insurance to provide for children if they are left behind. Usually, this is done by making the surviving spouse the kid’s beneficiary. The court would get involved if you name a child a beneficiary. The probate court would name a guardian who has oversight of the money until the child comes of age.
To provide for the children there are two options…
- Name an Adult Custodian – You would appoint someone you feel would be responsible and caring because they would handle things like housing, health care, and education until the child reaches the age of majority. Then the child gets the money and they can spend it any way they want.
- Work With an Attorney To Set Up a Trust – The trust is the beneficiary and a trustee is named to manage and distribute the funds. You have more control over naming a custodian. A trust allows you to specify how you want the money distributed. Consult with an attorney especially if you are dealing with a special needs child. With a special needs child you need a trust that will not impact your child’s eligibility for Medicaid or supplement security income.
Naming a Charity
Naming a charity as a beneficiary is simple… you write in the charity name on your beneficiary designation form. Life insurance policies allow you to pick multiple beneficiaries and even specify what percentage of the money should go to each beneficiary. So you can decide that 100% of your benefit should go to a charity, or 80% to your family and 10% to charity, or any combination you’d like. It’s also possible to name a charity as your secondary beneficiary. If, for example, your primary beneficiary is your spouse and you have no children or other heirs, you can name a charity as the secondary beneficiary in case your spouse dies with or before you. There is no federal tax benefit or state tax benefit for naming a charity as your life insurance beneficiary, and you can’t write off your premium payments as an income tax deduction. But with permanent policies, the proceeds will be eligible for the federal estate tax charitable deduction.
Helpful Beneficiary Tips
- Name a Beneficiary – If there isn’t a beneficiary named it can trigger a costly legal process known as probate. Make sure to name specific individuals or organizations.
- Name a Contingent Beneficiary – Just in case your 1st beneficiary is deceased the payout could go to someone that you never wanted your policy to benefit. It could even require a court-appointed administrator.
- Be Specific and Detailed – List the names along with addressed and Social Security numbers. This will help the insurance company track the beneficiaries down
- Regularly Review Your Beneficiaries – Once a year or after major life events such as marriage, divorce, the birth of a child or death in the family are good reasons to take a look at your beneficiaries.
- Communicate Your Wishes – Let your beneficiaries know your intentions and how to find the policy.
- Don’t Have a Separate Owner, Named Insured, and Beneficiary On A Policy – This situation can cause tax problems. Example: You buy a policy for your son John and your policy names his spouse Julie as the beneficiary. If John dies, it is very possible that the IRS may view the proceeds as a gift from you (the owner of the policy) to Julie (the beneficiary) and they could tax the proceeds. An insurance agent can give you life insurance advice on this and much more.
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Rollins Insurance is an independent insurance agency providing our clients the best prices with the most coverage possible since 2008. We represent multiple A-rated insurance companies to make sure we deliver the most competitive rate packages to our clients in Kentucky and Ohio. We find that most people are under-insured and over-paying when we meet them. We love what we do and our primary business is Personal Auto, Homeowners, and Life and Health insurance. We are a family-owned and managed business that specializes in providing needs-based insurance services.
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