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Life Insurance Beneficiary Dos and Don'ts | Quotacy Q&A Fridays - YouTube
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Welcome to Quotacy's Q&A Friday
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where we answer your life insurance questions.
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Quotacy is an online life insurance agency
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where you can get life insurance on your terms.
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I'm Jeanna
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and I'm Natasha.
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We're mixing it up a bit today.
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Setting up your policy's beneficiary is an important step
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in buying life insurance.
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And making sure they are set up properly is something
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Quotacy agents often help clients with.
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So instead of answering a direct question today
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we're going to focus on a topic we get many different questions about
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and that topic is beneficiary designation best practices.
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OR nine things not to do
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when choosing your life insurance policy beneficiaries.
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Number one: don't name a minor child
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as your policy's beneficiary.
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Life insurance companies will not write a check worth
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thousands or millions of dollars to a minor child.
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If you name your child beneficiary to your policy
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and they are not yet legal adults when you die
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the court will appoint a property guardian to manage these funds
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until your child reaches legal age.
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To avoid this situation, instead name a trusted adult
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to be the beneficiary.
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Someone who will use the life insurance proceeds
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for your child's benefit.
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Or create a living trust and name your children
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the beneficiaries of the trust and then name the trust
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the beneficiary of your life insurance policy.
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A trustee you appoint will then manage the funds if your
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children are minors.
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With a trust you can also specifically state how much
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money will be transferred to your beneficiaries and when.
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Or you can designate your minor children as beneficiaries
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of your policy under the Uniform Transfers to Minor Act.
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Under UTMA a custodian manages the proceeds for the child
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but when the child legally becomes an adult
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the custodian must transfer the proceeds over.
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A trust may be a better option if you worry about
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your 18-year-old having hundreds of thousands of dollars
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transferred to them in one fell swoop.
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Number two: don't update your will beneficiaries
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without updating your life insurance policy beneficiaries.
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Not many people realize this but a life insurance policy
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trumps a will.
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If your will states
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"I want my life insurance death benefit to go to my sister"
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but your life insurance policy beneficiary lists your brother,
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your sister's going to be left out.
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If your will and life insurance policy name different beneficiaries,
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the life insurance money will go to whoever stated on the policy.
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Number three: don't accidentally disqualify a beneficiary
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from government benefits.
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This mistake can happen if you have dependents relying
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on government benefits such as
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Supplement Security Income or Medicaid.
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For example, if your adult daughter has special needs
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we don't recommend naming her as your
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life insurance policy's beneficiary.
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Having any assets worth more than $2,000 would disqualify
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your special needs daughter from many
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federal and state assistance programs.
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Set up a special needs trust instead.
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Because the trustee has control over the funds
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in a special needs trust, and not your child,
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your child can still qualify for government assistance.
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Number four: don't be vague.
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So, Jeanna, let's say you want to name your five siblings
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as your life insurance policy's beneficiaries.
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Don't just write in "my siblings" on your paperwork.
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They'll receive the death benefit checks much faster
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if you list their full names and contact information.
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Also, if you want different siblings to get
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different amounts of money be sure to list the percentages.
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For example, maybe you would prefer your three siblings
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with children to get a little bit more money than the
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siblings that don't have children.
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Number five: don't overlook your spouse
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in a community-property state.
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If you choose to name someone other than your spouse
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as a beneficiary, community-property states require your
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spouse to sign a form waiving rights to the money.
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Generally, as a policyowner, you have a lot of
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flexibility on who you can name as a beneficiary
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of your policy; however, if you live in
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a community-property state and income earned during
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the marriage is used to pay the premiums,
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then typically your spouse legally has rights
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to 50% of the death benefit even if you name someone else
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as the primary beneficiary.
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Number six: don't fall into a tax trap.
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If your life insurance policy states three different people as
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the owner, the insured, and the beneficiary,
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then the death benefit could count as a taxable gift.
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For example, if a wife owns a life insurance policy
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on her husband and the adult daughter is the beneficiary
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then according to the law, the wife is gifting her daughter
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the policy proceeds when her husband dies.
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The person who makes the gift, in this case the wife,
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will be subject to a tax if it exceeds federal limits.
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In the insurance industry, this is known as
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the unholy trinity or the Goodman triangle.
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But worry not.
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This situation is easily remedied.
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The husband could instead simply own the policy on himself
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and name the daughter the beneficiary.
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Number seven: don't forget to name
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a contingent beneficiary.
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People often make the mistake of only naming their spouse
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as the beneficiary.
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But what happens if your spouse dies before you?
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Or what if you die at the same time?
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If no living beneficiary exists, the life insurance proceeds will
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go into the estate and is subject to probate
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where the courts decide who gets what.
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Probate can be a very long process.
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Another complication to having no living beneficiaries
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would be creditors.
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Normally, life insurance proceeds are protected from creditors
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but if there are no living beneficiaries,
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then the proceeds can be open to creditor's claims.
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So be sure to name a contingent, or back-up, beneficiary
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to receive the death benefit if the primary predeceases you
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or is otherwise unable to accept the money.
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Number eight: don't forget to occasionally review
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your policy beneficiaries and update as needed.
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You will not believe how often this scenario occurs.
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Boy meets girl.
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Boy marries girl.
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Boy buys life insurance and names the girl the beneficiary.
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Boy and girl divorce.
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Boy marries a new girl.
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Boy dies, but never updates his life insurance policy.
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Guess who gets the life insurance death benefit?
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The ex-spouse.
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We recommend that you review your policy after every big event,
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such as marriage, divorce, new births, home purchases, grandchildren, etc.
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And finally number nine:
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don't keep your life-insurance policy a secret.
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Tell your beneficiaries that they are beneficiaries
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of your life insurance policy.
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If you die and your loved ones had no idea
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you had life insurance then it was all a waste.
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Life insurance companies have millions of clients.
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They don't know when one of them dies
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unless they're sent a death claim.
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Be sure to talk with your family and beneficiaries
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about the policy and where they can find it in the event
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of your death.
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Thanks for watching.
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If you have any questions about life insurance,
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make sure to leave us a comment.
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And if you have any questions regarding today's topic
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check out the blog link posted below.
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Otherwise, tune in next week can we talk about
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term life insurance basics.
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Bye!
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