It is wise to take a few extra steps to plan how you set up your beneficiaries on a life insurance policy.
Maximize Contingency Planning
In a few short words, the problem is this: minimal contingency planning. The basic beneficiary form when applying for a policy just gets you started, as you purchase your plan.
In order to assure that the right people get the benefit money at the right time, you will need to think beyond naming primary and contingent beneficiaries. Most policies establish naming a wife and husband as each other’s’ beneficiary and their children as contingent beneficiaries, while possibly naming a trustee until the children are at the age of majority.
But what if the surviving spouse remarries and the new spouse, unfortunately, spends the cash benefit for other purposes? This is one of many contingencies that are rarely spelled out in the basic insurance application.
Here are a few basic concerns
- The surviving spouse gets paid the benefit but is, or marries a spendthrift who might exhaust the funds recklessly disallowing your family to live in financial security for the longer term.
- The inheritance in the hands of a child destined for University, can corrupt his or her determinant need for making an income, or going to university or college This can present a roadblock in the way of the child deciding to move to acquire a degree or job and helps create a lazy prodigal.
- A child who lacks life experience, and investment knowledge, might make riskier decisions with a lot of the money, not calculating the future need for educational expenses.
- A child who is or could be prone to drug or alcohol addiction receiving a lot of cash could be placed into harm’s way, funding an addict’s lifestyle.
- Lack of experience investing money sets up a financially naïve spouse or child who is the beneficiary of a large sum of money, as prey to unscrupulous make-money-quick or Ponzi schemes.
- If an advisor is not established ahead of time in a trust or a will, an unqualified person may find access to invest the funds unscrupulously, and unethically, and/or be unable to navigate a volatile market.
- Younger children may need a lot more of the beneficiary funds, due to potentially being more time preceding age of majority, whereas older mature or married children may already be educated and well-established. In the same vein of logic, with regard to educating all of the children, the basic beneficiary form cannot deal with proper equalization of funds among children some of whom may already be successively educated by deceased parents when they were alive should they both later die and leave younger children.
Alternatives to establishing beneficiaries
Certainly, buy the life insurance policies needed and establish beneficiaries and/or the estate. Then hire a lawyer who can help you in the following ways:
- Set Up Educational Trusts Retain your life insurance proceeds in one pooling fund from which the children’s educational and maintenance expenses can be paid. A sum can also be divided among the beneficiaries equally.
- Delay or Stagger Inheritance Distribution This plan allows for discretionary expenditures from the life insurance proceeds for certain defined purposes. A child can receive their inheritance in phases staggered at certain amounts or percentages as the named child grows in investment and money management experience over time.
- Lifetime Trusts This trust can assign money to spendthrifts or an addict or one with health or creditor issues allowing someone else to manage and distribute the funds only as needed. If the first beneficiaries die, money can be attributed to another beneficiary such as a charity or grandkids.
- Tax Planning in Trusts It is possible to set up a trust where the beneficiary controls the trust immediately, or at a set age, or in stages but can distribute money at his discretion to a variety of beneficiaries, such as his own children. Such income taxed in the beneficiaries’ hands may be able to be taxed at their rates, perhaps less than if monies were all taken into income in one payment. Note: Because tax laws change, get professional guidance.
- Survivorship Clauses A trust can achieve similar directives as a will can – requiring a minimum survival period prior to an heir receiving money. This circumvents payment to heirs that may die shortly after you (due to accident for example), allowing money to go to secondary beneficiaries.
More beneficiary planning options can be explored with your lawyer.