A key
consideration of term life insurance
policies is designating the policy
beneficiaries. Let's first
understand what the term means and dig a
little deeper into choosing your
beneficiaries.
It's
always good to start with the official
definition:
An
individual, institution, trustee or
estate which receives, or may become
eligible to receive, benefits under a
will, insurance policy, retirement plan,
annuity, trust or other contract upon
the death of a certain person.
Now
that we have that out of the way...a
beneficiary is essentially the person
who will receive money when the benefits
are triggered. In most cases, this
is a spouse, children, or other family
members.
It's
the person or entity you list in the
term life insurance
plan to receive
the death benefit. It can be:
one
person
two or more people
trustee or trust you have already
established
a charity
your estate.
Primary and Secondary or Contingent
Beneficiaries
There's usually a pecking order to the
list of beneficiaries. The life
benefits will be paid to the primary
beneficiary if available and possible.
Otherwise, the policy will usually pay
out to the secondary or contingent
beneficiary. It's possible to
designate more than one person as the
primary beneficiary with some sort of
percentage split among them.
In
most cases, the beneficiary is pretty
self-explanatory but you want to make
sure to be clear. For example, you
would not want to list "spouse" as the
beneficiary. It's better to use
the spouse's name and even SS#
otherwise, ex-spouses might lay claim to
the benefit and this result in disputes,
which is the last thing you intended.
Clear and precise is the rule of order
when choosing beneficiaries. You
can make changes to this area but it's
best to change it immediately or better
yet, designate it correctly from the
beginning to avoid potential disputes
and issues. It makes sense
to specifically name someone if that's
your intent to avoid the delay and cost
of probate (where benefits go through
the estate instead of direct to a
person).
Clarity in how the benefits is to be
paid to beneficiaries is also extremely
important with term life insurance
policies. For example, if you have
three children and designate an equal
amount to each, what happens if one
deceases before you or cannot be found?
Specify exactly how this type of
situation would be handled so there's no
confusing. Wills are not a
substitute for properly naming your term
life beneficiary as wills traditionally
deal only with estate issues (probate).
Probate is subject to taxes and
creditors so it's important to name a
person's name directly as a beneficiary
to avoid this.
Try
not to use exact dollars as the amounts
can become outdated. Percentages
stay true regardless. Try not to
use your estate as the beneficiary as
that opens up your life benefit to
probate, taxes, etc. One of
the great benefits of life insurance if
the beneficiaries are properly listed is
that it avoids the issues associated
with estates. In some states,
listing minors as beneficiaries can pose
problems since they may be required to
have a legal guardian appointed by the
court to manage their money.
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