You have planned out what kind of policy is best for you and have calculated how much insurance your loved ones need to not only cover your final expenses but also to live without your income. But, when the question comes up between you and your financial advisor- who should you name as your beneficiary?
A beneficiary is the individual or individuals who will receive your death benefit after you pass on. Though it may seem like an easy decision, it is certainly a part of the life insurance process worth taking the time to consider carefully. First, ask yourself the intention of the policy- who is the money intended to help or protect? This fundamental question will help to guide your decision.
Many policy holders purchase life insurance policies in the first place to care for their children or other dependents in their care, such as special needs relatives. So, it may seem to make logical sense that those individuals would sign their children/dependents as their beneficiaries. According to the article “Life Insurance And Kids: A Matter Of Trust” from Forbes, it is advised to not list a minor as your beneficiary. If they are minors when you pass, they will not receive the benefit until they come of age. Instead of them receiving the death benefit, a guardian will be appointed for the child, a process that imposes legal fees, court proceedings and court supervision of the benefits. This can result in extreme financial struggle for the child and/or family involved. However, you may want to consider the alternatives. You can instead name your spouse or partner as the primary beneficiary, and amend your will to explain how the funds should be distributed to your children. While this is the easiest option, other alternatives include either setting up a child’s trust wherein you can set up the age at which your child may begin receiving funds, or setting up a Uniform Transfers to Minors Act (UTMA) custodianship.
Similarly, listing a special needs dependent as your life insurance beneficiary can cause complications down the road. Naming them as a beneficiary may disqualify them for other needs-based government funding to help cover the costs of their care. Instead, setting up a special needs trust “will provide financial assets for a special needs child’s future care and well-being, while maintaining the child’s eligibility for government benefits,” according to writer Bill O'Quin‘s article for the non-profit Life Happens. This trust is managed by a predetermined trustee, who is able to use it for your dependent’s care as a supplement to other needs-based funding. Additionally, this trust can be the beneficiary of life insurance policies which is one cost efficient way to fund the trust. While setting up the Special Needs Trust, it is highly recommended that you speak with an attorney who is experienced with this particular type of trust.
As an alternative to listing an individual as a beneficiary, policy holders may choose to donate their death benefit funds to a particular charity. This option presents the death benefit to the selected charity in the form of a donation upon the policy holder’s death. Making a charity the beneficiary on an existing policy is just one way to donate through your life insurance. Policy holders also have the choice to make the charity the owner of the policy, which allows you to pay the premiums as gifts to the charity. Paid up policies, such as whole life policies, can be donated to a charity while the policy holder is still alive, which will provide a tax benefit for the policy owner. Be aware that each state may have different laws around using a charity as a beneficiary or owner of a life insurance policy. For more information on naming a charity as your life insurance beneficiary, check out this article from Life Happens. You should also check with your Accountant or Financial Advisor on charitable donations and the impact on your taxes.
If you are interested in learning more about life insurance policy options offered through your New York State Bar Association membership, check out the NYSBA Insurance Program online here.