*Guest post

 

You’ve gone to the trouble and expense of purchasing a life insurance policy to provide for your loved ones after you pass. Find out why you should name more than one beneficiary and avoid problems that lead to life insurance not paying out as you intended.

What Happens when there is No Life Insurance Beneficiary?

 

When a beneficiary to a life insurance policy predeceases the insured or cannot be found, the death benefit will go to the insured’s estate. The insured’s heirs may receive some of the death benefit eventually, once the estate is settled, however in the meantime the death benefit will be co-mingled with the insured’s assets and will be subject to the claims of creditors.

Another detriment to having the death benefit go to the insured’s estate is that it will be subject to estate tax if the estate exceeds a certain amount established by the IRS and by the state in which the insured lived.

 

Naming a Child or Disabled Person as Beneficiary

 

Naming a minor child or a mentally-incompetent person as a life insurance beneficiary will involve the court system, as a judge must designate someone to administer those funds for that person.

If you want your life insurance payout to go to a minor child or disabled person, it is a better idea to set up a trust for that person and name the trust as beneficiary. This way you, not a judge, choose the person who will act as trustee and administer the funds.

 

 

What is a Primary Beneficiary?

 

The primary beneficiary to a life insurance policy is the person who will receive the death benefits first if there are other beneficiaries named. You can name more than one primary beneficiary and designate that they split the death benefit equally or in any proportion that you wish.

 

 

What is a Secondary Beneficiary?

 

Also called a “contingent beneficiary,” the secondary beneficiary to a life insurance policy receives the death benefit if the primary beneficiary has died or cannot be found. Again, an insured can name more than one secondary beneficiary and designate that the death benefit be shared in any proportion they wish.

 

 

Be Specific in Your Life Insurance Designations

 

Designate your life insurance beneficiary or beneficiaries by name. If you do not, you risk creating the circumstances for a life insurance beneficiary dispute.

For example, if an insured designates “all of my children” as life insurance beneficiaries, does he mean the children from his first marriage, his adopted children from a second marriage, his third wife’s children whom he considered his but never adopted, and his natural child? All of them? Some of them? You can see the problem.

 

 

Keep Your Life Insurance Designation Up-to-Date

 

It is important to keep your life insurance beneficiary designation up-to-date with your life circumstances. For example, if you were at one point estranged from a child and dropped them as a life insurance beneficiary, then you reconcile, be sure to add them as a beneficiary if you want them to receive the death benefit or a portion of the death benefit. Failing to do so will likely cause a rift, if not litigation, between your children over those funds.

If you are married and designate someone other than your spouse as your beneficiary, bear in mind that in community property states your spouse is entitled to that portion of the death benefit that was funded from marital assets.

If you were previously married, are paying support, and are under court order to maintain life insurance for the support obligees, you must designate those obligees as beneficiaries. If you do not, they are entitled to the death benefits anyhow.

If you have divorced but intend your former spouse to remain as beneficiary, whether under a court order or not, you will have to re-designate your former spouse as beneficiary if you live in an “automatic revocation” state. In these states, a former spouse’s life insurance beneficiary designation is automatically revoked upon divorce.

Designating multiple beneficiaries by name and keeping your beneficiary designations up-to-date ensures that your death benefits are distributed as you intend.

 

About the Author

Veronica Baxter is a writer, blogger, and legal assistant living and working in the great city of Philadelphia. She frequently works with and writes for Boonswang Law, a national life insurance attorney firm based in Philadelphia.