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Part of the process of buying life insurance is to structure it. You know that you need a specific type of insurance to suit your long-term needs, and you know that you need a sufficient death benefit to pay off all of your debts, but do you understand just how important it is to designate a beneficiary? You pay for your life insurance coverage to provide some type of financial lifeline to your spouse, your children or even your parents in the event of your untimely death. Start comparing life insurance plans now by using our FREE tool above!
Failing to structure your policy properly or designate the appropriate beneficiary can lead to estate taxes, the lengthy legal process called probate, and even claims from creditors. This is why it is so crucial that you put a lot of thought into which loved ones you want to list and which loved ones would receive life insurance payouts if your primary options could not be located. To really ensure that you structure your policy in a way that complications will not arise, you should always designate a contingent beneficiary. Read this guide to contingent beneficiaries and your alternate options to estate planning.
What is a beneficiary?
When you buy life insurance, you are paying to guarantee that the ones that you love will receive a stated amount when a covered death claim is filed. Your policy will not just pay whoever presents a death certificate or makes claims on the funds. Instead, you must select an individual or an entity that will receive the death benefits of the policy. The person or the entity that you name is called a beneficiary.
In some states, a life insurance beneficiary must have an insurable interest in your life before you can name them. This interest only needs to exist at the time of the application. You should always verify that the individual that you are listing is eligible when you are binding your policy so that the designee can receive the proceeds that you intended them to while you were paying hundreds of dollars every year for the coverage.
What are the disadvantages of failing to name an individual as a beneficiary?
If you know that you need to apply for coverage sooner rather than later but you are simply not sure who you want to receive your death benefits, it might be tempting to list no beneficiary and leave it to fate. When there is no beneficiary listed on your policy, the beneficiary will automatically become the executor of your estate. There can be serious problems when no individual or entity is named and when your estate becomes the policy beneficiary.
One of the biggest pitfalls of your estate becoming your beneficiary is that the proceeds that your carrier will pay the proceeds of your insurance only after the proceeds have gone through probate.
The primary reason why the proceeds will go through probate instead of bypassing this legal process is because the benefits become part of the estate when it is not designated to an individual or a trust. Since probate is a lengthy process, it can delay payout. Creditors also have first dibs on whatever assets are in the estate, limiting how much will ultimately be paid. In the end, a policy with no beneficiary may not even reach a loved one by the time estate taxes and creditor debt are taken out.
What problems can arise when an individual is named?
When you do name a beneficiary, you might think that you have structured your proceed payout in a way that probate can be bypassed. You have selected a lump sum, interest only, fixed period, or annuity settlement option and you have the peace of mind in knowing that your loved one will get what they need to replace your income, pay off debts and cover living expenses.
Unfortunately, even if you do choose a settlement option that is best for your beneficiary, that does not mean that the settlement will go as planned. If, for some reason, a beneficiary cannot be located or the person you named is already deceased, this can pose some major problems. Here are some of the scenarios that have happened when only one designee was on a life policy:
- The contact information is old and beneficiary cannot be located
People change their phone numbers and move to new addresses regularly. When someone moves, it is not common to pick up the phone and change your beneficiary contact information right away. This would be very responsible, but a factor that is commonly overlooked.
If you did not provide your beneficiary’s social security number, there is a good chance that your insurer will have trouble locating the designee of the descendant. The company will attempt to use databases and will send letters, but the money will go to an unclaimed account after a short period of searching. The lost life insurance will stay unclaimed until the beneficiary locates the policy on their own. If you believe that a loved one who passed may have left you a death benefit, you can track down unclaimed life benefits by using The National Association of Unclaimed Property Administrators site to search records.
- The named beneficiary was convicted of a serious crime
People do kill just for life insurance. It sounds like a crime that you see in the movies, but art imitates life. You would never leave your policy to someone who you would expect would commit murder to receive a huge payout, but it is important that you educate yourself on what can happen in all scenarios.
If the named beneficiary on your policy is named as a suspect or convicted of murder, they are not entitled to receive the proceeds. This is called a slayer statute in most states and is intended to prevent payout if the designee intentionally caused the named insured’s death. Currently, 42 states have this statute. The carrier has the right to go to court and provide proof as to why the beneficiary is not entitled to the payouts even when they are not convicted of a crime, but they were investigated as being involved.
- The beneficiary is deceased by the time a death claim is filed
You select a beneficiary that you love with the hopes that the person will outlive you, but this does not always happen. If the named individual passes away before you or in the same incident, this can create some serious issues. When there is no other beneficiary on the policy, there is no one left to designate. This means that the policy will be treated just like no beneficiary was named and the proceeds will go to the estate where they will pass through probate and into the hands of the executor.
How can you prevent your policy from going to the estate?
Now that you know how beneficiaries work and some of the problems that can arise when you only have a single person named, you need to learn about what your options are. One option is to list a contingent beneficiary. A contingent beneficiary is a person who can claim a payout for the proceeds if the primary beneficiary has passed or if they are ineligible for payout for some reason. A contingent designee is not someone who will share the benefits, but instead someone who is only entitled to payment if the primary person named cannot make a claim.
Naming only a primary beneficiary is a huge mistake. There is always a possibility that a person will predecease you, and you need to be prepared for this possibility. You do not want the money that you wanted your children, grandchildren or even great-grandchildren to go to creditors because the funds were subject to probate.
Other Alternatives to Naming A Person
Naming an individual is not the only option when you are designating a beneficiary. You can also designate a revocable or irrevocable living trust. By doing this, you can leave detailed instructions on how you want life proceeds to be handled and you never need to worry about the money going through probate or being intercepted by the government. Some of the benefits of living trusts include:
- Avoid probate
- Leave money to a minor
- Prevent incidents of ownership
- Give trustee control over proceeds
- Instruct stipulations to how the benefits can be paid
- Prevent the money from being intercepted by creditors or Federal government
As you can see, there are a lot of considerations that you need to keep in mind when you are structuring your life insurance. Buying life insurance is part of the big picture and should be a part of your estate planning as a whole. If you want to price the cost of coverage to pay for your debt or to help your heirs maintain your legacy, start comparing quotes online with multiple companies right now and use a tool that gives you instant quotes. Start comparing life insurance now by using our FREE tool below!