Life insurance may be the most important risk management tool you have in your personal and business portfolio. It could be the capital your family needs to make sure a surviving spouse and children are well cared for after you pass. It could be a wealth transfer tool for families with a higher net worth. Or, it could just be a small policy aimed at offsetting the cost of ever increasing funeral expenses.
Regardless of the goals you have with your life insurance, naming the proper beneficiary may be more difficult than you initially thought.
Should you name a spouse? Many clients will name their spouse as their beneficiary, for good reason. Here are a few:
- Provides quick access to cash when they need it most
- Provides the ability to help support minor children
- Provides the ability to continue, or start, educational goals of children
However, there are some cons to naming your spouse:
- Once received, the benefit is theirs to use as they wish
- In blended families, blood heirs of the deceased spouse may lose out
Should you name children (or grandchildren)? Most insurance companies will not allow minors to be named as beneficiaries, in which case you may want to create a trust or appoint a guardian of the funds in your will (otherwise, those funds may be subject to expensive court supervision). As to adult children, the pros are similar to that of a spouse, and can become quite handy in blended family situations to ensure blood heirs are provided for. However, there are some potential cons:
- Immaturity, not many 18 year olds can handle a $500k inheritance wisely
- Unintentional shortfall to care for surviving spouse
Should you name a trust? This is sometimes a great primary, but almost always a wonderful secondary beneficiary for life insurance proceeds. Here are some pros:
- Broad discretion in how the funds are used and distributed
- Avoids inadvertently causing a special needs beneficiary to lose government assistance
- Avoids gifting the proceeds directly to minors, which may lead to expensive court supervision and management of the funds
There are some cons as well:
- May take longer to process and pay out
- May have less flexibility for surviving spouse to use funds as needed
This is a short list of many factors you should consider when naming the beneficiary(ies) on your life insurance policy. When you are ready to explore your options, call an estate planning attorney familiar with life insurance and the various ways it can help you plan your legacy. If we can help, feel free to contact us.