In the first part of this series, we discussed the first three of six questions you should ask yourself when selecting a life insurance beneficiary. Here we cover the final half.
Selecting a beneficiary for your life insurance policy sounds pretty straightforward. But given all of the options available and the potential for unforeseen problems, it can be a more complicated decision than you might imagine.
For instance, when purchasing a life insurance policy, your primary goal is most likely to make the named beneficiary’s life better or easier in some way in the aftermath of your death. However, unless you consider all the unique circumstances involved with your choice, you might actually end up creating additional problems for your loved ones.
4. Are any of your beneficiaries minors?
While you’re technically
allowed to name a minor as the beneficiary of your life insurance policy, it’s
a bad idea to do so. Insurance carriers will not allow a minor child to receive
the insurance benefits directly until they reach the age of majority.
If you have a minor named as your beneficiary when you die, then the proceeds
would be distributed to a court-appointed custodian tasked with managing the
funds, often at a financial cost to your beneficiary. And this is true even if
the minor has a living parent. This means that even the child’s other living
birth parent would have to go to court to be appointed as custodian if he or
she wanted to manage the funds. And, in some cases, that parent would not be
able to be appointed (for example, if they have poor credit), and the court
would appoint a paid fiduciary to hold the funds.
Rather than naming a minor child as beneficiary, it’s better to set up a trust for your child to receive the insurance proceeds. That way, you get to choose who would manage your child’s inheritance, and how and when the insurance proceeds would be used and distributed.
5. Would the money negatively affect a beneficiary?
When considering how your insurance funds might help a beneficiary in your absence, you also need to consider how it might potentially cause harm. This is particularly true in the case of young adults.
For example, think about what could go wrong if an 18-year-old suddenly receives a huge windfall of cash. At best, the 18-year-old might blow through the money in a short period of time. At worst, getting all that money at once could lead to actual physical harm (even death), as could be the case for someone with substance-abuse issues.
If you set up a trust to receive the insurance payment, you would have total control over the conditions that must be met for proceeds to be used or distributed. For example, you could build the trust so that the insurance proceeds would be kept in trust for beneficiary’s use inside the trust, yet still keep the funds totally protected from future creditors, lawsuits, and/or divorce.
6. Is the beneficiary eligible for government benefits?
Considering how your life insurance money might negatively affect a beneficiary is critical when it comes to those with special needs. If you leave the money directly to someone with special needs, an insurance payout could disqualify your beneficiary from receiving government benefits.Under federal law, if someone with special needs receives a gift or inheritance of more than $2,000, they can be disqualified for Supplemental Security Income and Medicaid. Since life insurance proceeds are considered inheritance under the law, an individual with special needs SHOULD NEVER be named as beneficiary.
To avoid disqualifying an individual with special needs from receiving government benefits, you would create a “special needs” trust to receive the proceeds. In this way, the money will not go directly to the beneficiary upon your death, but be managed by the trustee you name and dispersed per the trust’s terms without affecting benefit eligibility.
Make sure you’ve considered all potential circumstances
These are just a few of the questions you should consider when choosing a life insurance beneficiary. Consult with us a trusted advisor to be certain you’ve thought through all possible circumstances and named your beneficiaries in the best way possible.
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