Choosing Life Insurance Beneficiaries

Naming a beneficiary is part of purchasing a life insurance policy. You must designate who gets the money from the policy if and when you pass away. Life insurance policies require that you name a beneficiary and most people choose their spouse or children without a second though. However, choosing your beneficiary and keeping that choice up to date is important. Here are a few things to consider.

Choosing a Spouse

Most married individuals choose this option for 2 reasons:

1. Your spouse is the one person depending on you the most for financial stability.
2. Your spouse is the only person who will need immediate funds upon your death.

Choosing A Life Insurance Beneficiary

If you choose to name your spouse as your beneficiary, be sure to designate them by name. You would not want to name your spouse simply by designating "husband" or "wife;" because this could result in an ex-spouse receiving proceeds intended for others. Naming your spouse, rather than your estate or trust will give them funds that are readily accessible fairly quickly to pay funeral expenses and pending bills.

Choosing Your Children

Next to the spouse, children are the second most popular beneficiaries of life insurance policies. This too, can be a tricky process. For example, naming specific children may mean that later-born children will be left out, saying "Children of the insured, John Smith" could exclude children from your spouse’s previous marriage; "Children born of the marriage of John and Susan Smith" excludes adopted children. You can see how complicated a simple sentence can become when it is regarding a beneficiary.

If you choose to name your children, rather than your spouse, it is important to keep in mind the ages of your children. Naming minor children is not recommended. Rather, name an adult who can serve as guardian for minor children and a trustee for insurance proceeds and other assets. For this reason, if it is your wish that your children receive your life insurance proceeds, it is probably best to name your trust as the beneficiary and specifically designate there how the money is to be divided.

Choosing Your Estate/Trust

Life insurance proceeds payable to a named beneficiary are generally not taxed with your estate. However, if you name your "estate" as beneficiary then the money must go through probate and is subject to taxes (and a lengthy probate case). If you’d like your life insurance money to be funneled through your trust, the beneficiary needs to be your Living Trust, not your “estate”. This will insure that the estate taxes are limited or eliminated completely and you won't need to name a contingent beneficiary since the trust agreement itself will address both your primary and secondary beneficiaries.

Also, naming your trust as the primary beneficiary will insure that a minor beneficiary's share will be handled properly without the need for establishing a guardianship or conservatorship. When choosing a beneficiary, keep in mind your state or company policy restrictions. For example, if you're married, your spouse may have to sign a waiver before you can name someone else as the beneficiary.

Choosing your beneficiary is an important decision. You want to choose someone who needs the money, who will be responsible with the funds and who will benefit most from their distribution. Life insurance funds are meant to be used for the immediate costs associated with death (medical bills, funeral arrangements, bills, etc.) so keep in mind who would be responsible for these items when you die.

It is important to talk to your local insurance agent about your life insurance policy and review and/or update your beneficiaries on a regular basis.

By Matt Reynolds - Google+

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