Six life insurance beneficiary mistakes to avoid

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Life insurance has long been recognized as a useful way to provide for your heirs and loved ones when you die. Naming your policy’s beneficiaries should be a relatively simple task.

However, there are a number of situations that can easily lead to unintended and adverse consequences:

Not naming a beneficiary
The most obvious mistake you can make is failing to name a beneficiary of your life insurance policy. But simply naming your spouse or child as beneficiary may not suffice. It is conceivable that you and your spouse could die together, or that your named beneficiary may die before you. If the beneficiaries you designated are not living at your death, the insurance company may pay the death proceeds to your estate, which can lead to other potential problems.

Death benefit paid to your estate
If your life insurance is paid to your estate: 1) The insurance proceeds likely become subject to probate, which may delay the payment to your heirs. 2) Life insurance that is part of your probate estate is subject to claims of your probate creditors. Not only might your heirs have to wait to receive their share of the insurance, but your creditors may satisfy their claims out of those proceeds first. Naming primary, secondary, and final beneficiaries may avoid having the proceeds ultimately paid to your estate.

Naming a minor child as beneficiary
Insurance companies will rarely pay life insurance proceeds directly to a minor. Typically, the court appoints a guardian — a potentially costly and time-consuming process — to handle the proceeds until the minor beneficiary reaches the age of majority according to state law.

Consider a trust that names the minor as beneficiary instead. The trust manages and pays the proceeds from the insurance according to the terms and conditions you set out in the trust document.

Per stripes or per capita
It’s not uncommon to name multiple beneficiaries to share in the life insurance proceeds. But what happens if one of the beneficiaries dies before you do? Do you want the share of the deceased beneficiary to be added to the shares of the surviving beneficiaries, or do you want the share to pass to the deceased beneficiary’s children? That’s the difference between per stripes and per capita.

Per stripes (by branch) means the share of a deceased beneficiary passes to the next generation in line. Per capita (by head) provides that the share of the deceased beneficiary is added to the shares of the surviving beneficiaries so that each receives an equal share.

Taxes
Generally, life insurance death proceeds are not taxed when they’re paid. However, there are exceptions to this rule, and the most common situation involves having three different people as policy owner, insured, and beneficiary. Typically, the policy owner and the insured are one in the same person. But sometimes the owner is not the insured or the beneficiary, which can potentially lead to gift tax consequences.

Consult a financial or tax professional to address any of the issues listed above.

 Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2016.

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