Life insurance beneficiary designations are important

The purchase of a life insurance policy for many persons is akin to pulling teeth, and for such individuals, the sooner the whole process has been completed, the better.

For this and other reasons, many purchasers of life insurance make quick beneficiary designations without giving the matter sufficient thought.

If one is married, it may make sense to name one's spouse as the primary beneficiary.

Life insurance companies now require the Social Security number of the primary beneficiary to ensure that the correct person is the actual recipient of the policy death benefits.

Remember that the only person who may change a life insurance beneficiary is the policy owner, not the insured, and not the premium payer.

If you name your wife as beneficiary and you pass away, your wife could re-marry and those death benefits that you paid for could be confiscated by the new husband, and the intended benefits to your wife and children could be compromised.

The way out of this potential dilemma is to name a trust as your beneficiary, and, during your lifetime, you may instruct the trustee as to the proper disposition of those death benefits to accomplish your objectives.

One thing to remember concerning naming your wife or husband as the policy beneficiary is that the original designation will not change just because you have gotten divorced.

As a result, one of the best things that an owner of any life policy can do is to review all of the beneficiary designations of all the policies that one owns, particularly if you have gotten divorced.

Another trap to avoid here is naming specific children as beneficiaries.

Should you and your wife (either current or future) have any more children, these unborn children would be disinherited.

Further, if your children are minors and you want to name them as beneficiaries, I recommend that the beneficiary be a separate trust for the benefit of each child, rather than the child personally.

This trust could manage the death proceeds, investing them wisely until the child reached majority.

Having a beneficiary designation such as "all children born of the marriage of John and Jane Doe" would disinherit any future adopted children that you might have.

It is always a good idea to name a contingent beneficiary to protect against the possibility that the primary beneficiary could pre-decease the insured.

Life insurance and annuity beneficiary designations allow for the transfer of these contractual policy values to named individuals completely outside of your probated estate.

Similarly, if you have established trusts during your lifetime, those trust proceeds are not part of your probated estate.

Not being part of your probated estate does not mean; however, that those assets will by-pass the estate tax grinder (it will re-appear later this year, believe me).

The only way that life insurance death benefits can pass outside of your taxable estate is by naming an irrevocable life insurance trust as the policy owner, and, in essence, you will give up all ownership rights of that policy.

The use of such a trust instrument is the method used by virtually all persons of wealth to provide a tax-efficient way to generate the liquidity to pay estate taxes, by purchasing assets of the estate for the cash from the life policy.

Another terrible beneficiary designation is the naming of your estate.

In so doing, you would make the policy death proceeds part of your probated estate and would unduly lengthen the period of time required to get those death proceeds into the hands of the intended recipients.

Moreover, if the policy proceeds are part of your estate, then your will would determine who gets the cash.

On another note, if you have older children without health insurance, one of the provision of the new health care law is that insurance companies are precluded, beginning with the first plan year that begins after Sept. 22 of this year, from not covering children under age 27, even if that child is not your dependent.

Got a financial planning question for Greg? You may e-mail him at greg29803@gmail.com.

Greg Roberts is a certified financial planner with 35 years of financial and estate planning experience.