Naming a Beneficiary for Your Life Insurance Policy

You know – I’ve got friends of mine who live and die by the actuarial tables and I say “Hey. It’s all one big crapshoot anywho.” Groundhog Day

Do you remember the character Ned Ryerson from the 1993 movie Groundhog Day? He is the annoying former high school classmate-turned-insurance-salesman who badgers Bill Murray’s character Phil Connors into buying life insurance.

Hopefully it won’t take encountering a Ned Ryerson in a day that keeps repeating itself hundreds of times to convince you to buy life insurance.

To put it simply, you need life insurance if your spouse and your children depend on your income, or if your spouse would need to hire help for the domestic tasks you take care of (e.g., childcare, cooking, cleaning).

Whether you buy life insurance, or it is offered as a free or low-cost policy through your work, take some time to think about how you name the beneficiaries. By not doing it correctly, you may cause problems down the road.

I’m buying the life insurance policy to take care of my kids. Shouldn’t I just name them as beneficiaries?

Buying life insurance to provide for the care of your minor children or disabled adult children? Don’t name them as beneficiaries.

Why? If you name your minor child as a beneficiary, the court will appoint someone (not picked by you) to look after the life insurance proceeds, which can be cumbersome and expensive. Also, the money reverts to the children when they turn 18 or 21, depending on the state, an age at which they might not be mature enough to make wise decisions.

A better option is to set up a trust for children and name the trust as the beneficiary of the policy. Pick someone you trust to serve as the “trustee” to manage and spend the money for your child’s benefit. You can make the trust payable at a later age, such as 25 or 30.

Another option if minor children are involved is to name an adult as custodian under the Uniform Transfers to Minors Act. The custodian will manage the funds and use them for the child’s benefit until the child reaches 18 or 21.

If disabled adult children are involved, you will need to set up a special trust to preserve their ability to receive government benefits because anything more than a small cash gift can prevent them from getting aid.

Can I name someone other than my spouse as a beneficiary? I am buying the policy to take care of my kids from a prior marriage.

Yes, you can name someone other than your spouse as a beneficiary. However, if you live in a community property state like Texas, you will need to get your spouse’s consent, in writing, to do so.

I’m leaving everything to my husband (or kids)? Can’t I just name “my estate” as beneficiary?

Not a good idea.

If you name your heirs as beneficiaries, they get 100% of the proceeds directly from the insurance company.

However, if you name your estate as the beneficiary, the proceeds will become part of the probate estate and could cause potential estate tax issues. Also, your creditors will be able to place claims against the proceeds. This could result in a reduction in the amount of proceeds going to your heirs and a delay in their receipt of such proceeds.

I just updated my will. It’s such a hassle to go back and change the beneficiary designations on my life insurance policies. Doesn’t my will trump the life insurance policy?

Nope. The life insurance policy is a legal contract, which means the terms listed on it are the ones that go into effect if you die. Your will does not control or trump this contract. For example, if your updated will lists the beneficiary as your new husband and the life insurance policy has your sister listed as the beneficiary, the death benefit will be paid to your sister.

Avoid problems by monitoring and updating your beneficiary designations.

If you have any questions about naming a beneficiary on your life insurance policy, consult with an estate planning attorney.

So what life event drove you to buy life insurance? Marriage? First kid? Fourth kid? Losing your own parent? For me it was “all of the above.” Leave a comment or send me an e-mail.

Disclaimer: This website is made available for educational purposes only as well as to give general information and a general understanding of the law, not to provide specific legal advice. By using this website you understand that there is no attorney client relationship between you and the publisher. The website should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.