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Are Your Beneficiary Designations Up To Date? (part one)

An important part of being a parent is taking care of your child financially.  Saying it is the easy part, the hard part is doing it.   An often overlooked planning error with life insurance is when beneficiary designations are not up-to-date.  A good rule of thumb is to review beneficiary designations on any life insurance policies including group term life (and any other financial assets where beneficiary designations come into play) whenever a major life event occurs such as marriage, divorce, child birth, adoption, etc  – the same events where it’s a good idea to review your life insurance  coverage in general.  It’s always make sense to review your beneficiaries and overall plans every year or two years to make sure they’re still in order and something was missed that would impact your beneficiary designation.
Here’s what to think about when choosing a beneficiary—particularly how to ensure that your policy’s death benefit is distributed the way you want it to be.   A beneficiary is the person you designate to receive the funds in your policy in the event of your death.  You can name both a primary and a contingent beneficiary and, if you wish, multiple primary and contingent beneficiaries. The death benefit goes to the contingent beneficiary in case your primary beneficiary is also deceased upon your death.

How you choose your beneficiary (or beneficiaries) will depend on your situation and on the laws of your state. I’m not an attorney—always check with legal counsel if you want to be sure—but I do know these basics:
* Life insurance proceeds typically avoid probate and are distributed straight to your beneficiary.
* Life insurance proceeds are usually not subject to income tax.
Proceeds may be subject to the federal estate tax, if it’s in effect at the time of your passing and if your estate is substantial enough to be affected by it. It is advisable to work with an estate planning attorney and have a will drawn up—and a trust if the attorney determines it might cushion the financial blow of an estate tax (In my opinion, only an attorney who specializes in this subject should handle estate planning. Beware of living trust seminars and non-legal professionals who peddle living trusts.)
When you do meet with the estate-planning attorney, you should discuss your life insurance. If you already have drawn up a will or a trust, you should call your attorney prior to applying for insurance. If you do not have either document, you can change the owner and beneficiary of your life insurance policy at any time.
(Part Two Next Week!)

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