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6 Questions to Consider When Selecting Beneficiaries for Your Life Insurance Policy – Part 2
In the first part of this series, we discussed the first three of six questions you should ask yourself when selecting a life insurance beneficiary. Here we cover the final half.
Selecting a beneficiary for your life insurance policy sounds pretty straightforward. Unfortunately, choosing a beneficiary is much more complicated than you might think considering all of the different options and potential problems.
The primary purpose when purchasing life insurance is most likely to make the named beneficiary’s life easier in some way after your death. However, unless you consider all of the unique circumstances involved with your choice, you might actually end up creating additional problems for your loved ones.
In our last post, we discussed the first three of six questions you should ask yourself when choosing a life insurance beneficiary. Here we cover the remaining three:
4. Are any of your beneficiaries’ minors?
Although technically you can name a minor as a beneficiary of your life insurance policy, it is actually a very bad idea to do so.
Insurance companies do not allow minors to receive the benefits directly until they reach the age of majority – and for some carriers that is deemed to be 21 years of age. Also, State laws may require that a guardianship be set up to manage the money. In Florida, a guardianship is required if a minor inherits $15K or more.
If you have a minor named as your beneficiary when you die, then the proceeds would be distributed to a court-appointed custodian tasked with managing the funds, and of course, this would come as a financial cost to your beneficiary. And this is true even if the minor has a living parent. In other words, even if the child’s other living birth parent wanted to manage the money, they would have to go to court and ask to be appointed as custodian. In some cases, that parent would not be able to be appointed (for example, if they have poor credit), and the court would appoint a paid fiduciary to hold and manage the funds.
Instead of naming your minor children as a beneficiary, you could set up a trust for your children and name the trust as the beneficiary instead. This way you can avoid the court involved guardianship process, be able to choose who will manage the money, and provide for how and when the insurance proceeds will be used and distributed to your children.
5. Would the money negatively affect a beneficiary?
Although naming someone a beneficiary for your life insurance can be very helpful, it can also cause some unintended consequences you may not have considered. This is especially true when you are dealing with young adults.
For example, imagine all of the things that could go wrong if an 18 year old suddenly inherits a large amount of money all at once. Best case scenario, the 18-year old might go through all of the money quickly in a short amount of time. However, worst case scenario could be that inheriting so much money all at once could lead to actual physical harm (even death) as would be the case for someone with a substance abuse problem.
To try to protect against these situations, some life insurance policies allow for the benefits to be paid out in installments stretched out over a set period of time. However, as previously mentioned above, if you set up a trust to receive the insurance benefits, you would have total control over how your money is distributed and what conditions must be met for your children to receive the payment. You could even protect them from themselves should they develop an addiction or gambling problem or even from future creditors or divorce. Unfortunately, we never know what the future holds so having the built-in protections already in place allows for you to have the peace of mind knowing your children will be protected.
6. Is the beneficiary eligible for government benefits?
Considering how your life insurance money might negatively affect a beneficiary is absolutely critical when it comes to those with special needs. If you leave the money directly to someone with special needs, an insurance payout could disqualify your beneficiary from receiving government benefits.
Under federal law, if someone with special needs receives a gift or inheritance of more than $2,000, they can be disqualified for Supplemental Security Income and Medicaid. Since life insurance proceeds are considered inheritance under the law, an individual with special needs SHOULD NEVER be named as beneficiary.
Setting up a “special needs” trust to receive the insurance benefits is the way to ensure your loved one receives the insurance benefits but also avoids disqualifying them from receiving government benefits. By setting up a special needs trust, the money will not go directly to the beneficiary upon your death, but will go to the trust and will be managed by the trustee you name and disbursed per the trust’s terms without affecting benefit eligibility.
The rules governing special needs trusts are quite complicated and can vary greatly from state to state, so if you have a family member who has special needs, meet with us to ensure you have the proper planning in place, not just for your insurance proceeds, but for the lifetime of care your loved one may need.
Make sure you’ve considered all potential circumstances
These are just a few of the questions you should consider when choosing a life insurance beneficiary. Contact us to be certain you’ve thought through all possible circumstances.
And if you think you may need to create a trust—special needs or otherwise—to receive the proceeds of your life insurance, meet with us, so we can properly review all of your assets and consider how to best leave behind what you have in a way that will create the most benefit—and the least challenges—for the people you love. Schedule your Family Planning Session today.
This article is a service of The Solution Law Firm, P.A. We don’t just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That’s why we offer a Family Planning Session, during which you will get more financially organized than you’ve ever been before and make all the best choices for the people you love. You can begin by calling our office today to schedule a Family Planning Session and mention this article to find out how to get this $750 session at no charge.