Nominating Beneficiary For Life

You may have heard your insurance agent tell the story of a man whose barn burned down. His wife called the agent saying, “We had that barn insured for a hundred thousand and I want my money.” The agent responds, “Whoa there, slow down, it doesn’t work like that. We will assess the value of the barn and provide you with a new one of comparable worth.” The woman pauses in thought for a moment and retorts, “Well, in that case, I´d like to cancel the policy on my husband.”

After filling out the initial paperwork, we may rarely give our life insurance a second thought – except when it’s time to write the next premium check. Still, it’s wise to review the policy and your designated beneficiaries from time to time.

Often, because it has been so long since they last looked at the policy, people aren’t even sure who is named as the beneficiary. When they go back and check, sometimes they discover things are far different than they had remembered. When it comes to life insurance, here are a few basic things to keep in mind.

First, remember to let your beneficiary or another person know about the policy. Some insurance money is never claimed because the only person who had any information on the policy is now dead. If nothing else, this can save your beneficiary time and effort calling dozens of different insurance companies trying to find out if there was a policy.

Second, don’t try to change your beneficiary without completing the proper forms. Some mistakenly try to change their life insurance beneficiary in their last will and testament or by leaving a signed note. Generally, whoever is listed in the insurance documents will get the money regardless of what your will or any other document says.

You should change your beneficiary as circumstances change. If your beneficiary dies or if you simply rethink who should get the money, change the beneficiary in the policy documents. Until you do, the last named beneficiary in the policy will be the one to get the money. This can be true even if that person is a divorced spouse.

Also don’t forget to name an alternate beneficiary. If your beneficiary dies before you, the insurance money will be subject to probate unless you have named a contingent beneficiary. Not only would this cost time and money, but if a life insurance policy is probated it may become available to creditors even though it would otherwise be exempt.

Some are concerned about their beneficiary receiving all of the insurance money at once. They fear the beneficiary might be careless or squander the money. An easy way to deal with this is to establish a simple trust and have the insurance proceeds paid out to that trust. Your trust can then distribute payments to the beneficiary over time according to whatever conditions you specify. With a little effort you can ensure the money isn’t blown all at once.

Be mindful of the age of your beneficiary. If under 18 at the time you pass, a guardian will have to be appointed to manage the money until your beneficiary turns 18. This requires going to court and associated legal costs. A better way is to name a trusted adult as the beneficiary to receive the child’s money as a trustee or “custodian,” holding and managing it for the benefit of the child.

Finally, be careful about naming a beneficiary who is receiving disability, Medicaid, or other government benefits. Life insurance money can jeopardize those benefits. As with minors, a better way is to have the proceeds paid out to a simple trust which holds and distributes the money to the beneficiary on the terms you dictate in the trust.

In the end, life insurance isn’t complicated as long as you keep some important factors to keep in mind.