Choose a life insurance beneficiary
Life insurance is there to benefit your survivors, and it is essential to decide which of these people should receive the proceeds of your policy after your death. Choice can help ensure that the right family members receive police benefits quickly and simply.
The fact of not choosing a recipient, on the other hand, has exactly opposite effects. Life insurance that has no beneficiary when you die must go through the probate process. That could add “six months to a year” to the time of payment and “cost thousands of dollars in legal fees,” warns Joe Buhrmann, financial planning consultant at eMoney Advisor. And the eventual beneficiary of this process may not be the person you might have wanted.
Designating a life insurance beneficiary overrides the instructions in your will, says Sean Burke, vice president of Stuart Estate Planning Wealth Advisors in Coconut Creek, Fla. Without named beneficiaries, he explains, your insurance proceeds will be distributed like any other asset, as defined. in the will. In the absence of a will, the death benefit will be paid to your next of living relative. These default assignments may not match your wishes for your life insurance, Burke says.
We asked experts for advice on how best to ensure your death benefit gets to the people you want, and quickly, and how to manage your beneficiary designations along the way. Here are their tips.
Choose the person who counts the most on your income
As a general rule, the proceeds from your policy should go to the person or people who will be most financially affected by your death, advises Buhrmann. “For example, a spouse and / or children have a financial interest in the life of the insured because they probably need an income … to manage the household well.”
Consider adding multiple names to the policy. On the one hand, experts say it’s wise to choose a secondary beneficiary – someone who will receive payment if the primary beneficiary dies before the policy is updated. This way, you don’t need to tackle that chore as you are simultaneously struggling with other issues related to your beneficiary’s death.
You can also choose to have more than one beneficiary. We explain how it can work for family members below. But you might not want to limit your payment to your family.
In particular, if you own or co-own a business, you may want to arrange payment to your coworkers, either from your personal life insurance policy or from one designated at the business. This insurance – archaically known as ‘key man cover’, back in the days when business owners were almost invariably men – can help the business stay afloat as it suffers the ( possibly long) search for your replacement, according to Burke.
Decide how the benefits will be distributed
Remember that you can appoint more than one person to receive death benefits from your policy. But if you are doing it for your family members, you have to decide how the policy proceeds will be distributed.
There are two main choices, and it’s important to understand the difference between them, as this determines the distribution of benefits, says Buhrmann.
The simpler of the two is the per capita distribution, in which the policy benefit is divided equally among all of the people you specify as the beneficiary. This is the option to choose if, for example, you want your three children to each receive one-third of the payment, regardless of how many heirs each may have.
But there are advantages to the other choice, which is known as Per Stirpes – after the Latin word for “branches”. Under the per capita distribution, if one of your children dies before you and they have children of their own, their family will not receive any policy benefits. Instead, these would only be distributed to beneficiaries who are still alive.
In the Per Stirpes distribution, on the other hand, benefits are distributed evenly among all branches of the family, allowing you to provide for your grandchildren in case their parents pass away before you. The children of a deceased beneficiary would receive the share of the proceeds that would have gone to their parent, if they were still alive, divided equally among them.
If for any reason you prefer to ignore a child’s benefit and benefit a grandchild directly, you can do so by designating your child’s child as the beneficiary. But this may involve additional contingencies in the event that the grandchild is a minor when entering his insurance benefit.
Choose when and how minors will receive their funds
It is prudent to take action in advance in the event that any children or grandchildren become beneficiaries of your life insurance while they are still minors – defined as being under 18 or 21 in most states. and 25 in a few. However, you might not be comfortable if, say, an 18-year-old inherits a large sum because “what they do with that money could tip you into your grave,” says Burke.
There are several ways to prevent your kids from potentially losing their profits on NFTs and streetwear. The simplest option, advises legal site Nolo.com, is to have a trusted adult beneficiary use the money for the benefit of the children. More formally, the site says, you can also choose to appoint an adult custodian under your state’s Uniform Transfers to Minors Act (UTMA). Most insurance companies allow this and have forms for it.
Alternatively, you can appoint a family member or a lawyer as the trustee of the funds. “A testamentary trust receiving the proceeds and managing it accordingly may be more desirable” than leaving an inheritance in the hands of a teenager, says Burke.
Inform your beneficiary that they have been selected
The people you choose for your life insurance should not be ignorant of their status. Buhrmann urges not only to inform them that they are beneficiaries, but also about the amount of the benefit they will receive, “so that they can be prepared to do the right thing.” Not only inform family members but all business partners who will benefit, Burke adds. .
Adjust beneficiaries as your life changes
Life is not static, and just as you must adjust the policy itself based on changing circumstances, including a divorce, your beneficiary list must also be reassessed from time to time. “When a major life event such as divorce or death occurs, it is so important to inform beneficiaries,” says Burke. “You would be surprised how often people forget to do this.”
Buhrmann supports the importance of treating insurance policies as living documents. As with car ownership, he says, “it’s important that you ‘look under the hood’ periodically and perform routine maintenance” on your policy. He suggests planning annual reviews of your life insurance with your financial advisor or insurance agent.
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