If you buy life insurance for your family or are offered free life insurance with your company as an employee benefit, you will be asked to name a beneficiary. The beneficiary is the person who will receive the money upon your death. When you fill out the paperwork, you might not give this much thought. You may automatically write down your spouse or your children. It is worth taking some time to think about how you should designate the beneficiary of your policy.
You should not name your estate as the beneficiary. This means that the policy must go through the probate process to determine who should receive the money. The probate process may take months or even years. Your family will not receive the money quickly especially if it is necessary for their day to day needs immediately upon your death.
If you are buying life insurance for young children, you should not list them as the direct beneficiaries. The proceeds needs to be paid out to an adult who is in charge of the money for your children. Most life insurance companies are familiar with Uniform Transfer to Minors Act accounts. You name a custodian to manage the money for your children with this arrangement. The downside is that the money is given directly to your children when they turn 21 years old. They may still be too young to manage the money themselves.
You should set up a revocable living trust and name the trust as the beneficiary of the life insurance policy. With this arrangement, you can keep the money in trust for your children for a longer period of time. You name an adult who you think is trustworthy to control the money for your children. Also if you have a special needs child, you don’t want to jeopardize their government benefits. By using a trust for your estate planning, the life insurance benefits can be directly deposited into a special needs trust which will allow your child to maintain their government health insurance and social security benefits.
When your life changes, you need to update your policy. It is more common that you think to find someone listed as the beneficiary of a former spouse’s life insurance policy. After the policy holder dies, there is nothing anyone can do about it. Update your beneficiary designations whenever there’s a big life event: when you get married, when you get divorced, or when you have a child or grandchild join your family.
At Sinclair Prosser Gasior, we stress the importance of filling out the beneficiary designation forms properly and keeping them updated. You need to tell your executor or your trustee about the policies and where to find the paperwork. You may have a great plan in place but someone needs to know where to find the papers they will need.
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