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Part 2: Questions to Consider When Choosing Life Insurance Beneficiaries

Part 2: Questions to Consider When Choosing Life Insurance Beneficiaries

In the first part of this series, we discussed the first three set of questions you should ask yourself when selecting a life insurance beneficiary. Here we cover the final part.

Choosing a life insurance policy beneficiary sounds pretty easy. Because there’s so much that can go wrong, it can actually be more complicated thank you think!

For example, when buying a life insurance policy, your primary goal is most likely to make the named beneficiary’s life better or easier in some way in the aftermath of your death.  But if you don’t consider all of the unique circumstances involved with your choice, you might actually end up creating additional problems for your loved ones.

Last time, we discussed the first set of questions you should ask yourself when choosing a life insurance beneficiary. Here we cover the remaining three:

Are any of your beneficiaries minors?

Technically you can list a minor child as a life insurance policy beneficiary. But it’s a bad idea!  Insurance carriers will not allow a minor child to receive the insurance benefits directly until they reach the age of majority—which can be as old as 21 depending on the state.

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, often at a financial cost to your beneficiary. And this is true even if the minor has a living parent. This means that even the child’s other living birth parent would have to go to court to be appointed as custodian if he or she wanted to manage the funds. And, 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 the funds.

Rather than naming a minor child as beneficiary, it’s better to set up a trust for your child to receive the insurance proceeds. That way, you get to choose who would manage your child’s inheritance, and how and when the insurance proceeds would be used and distributed.

Would the money negatively affect a beneficiary?

When considering how your insurance funds might help a beneficiary in your absence, you also need to consider how it might potentially cause harm. This is particularly true in the case of young adults.

For example, think about what could go wrong if an 18 year old suddenly receives a huge windfall of cash. At best, the 18 year old might blow through the money in a short period of time. At worst, getting all that money at once could lead to actual physical harm (even death), as could be the case for someone with substance-abuse issues.

To help mitigate these potential complications, some life insurance companies allow your death benefit to be paid out in installments over a period of time, giving you some control over when your beneficiary receives the money. However, as discussed earlier, if you set up a trust to receive the insurance payment, you would have total control over the conditions that must be met for proceeds to be used or distributed. For example, you could build the trust so that the insurance proceeds would be kept in trust for beneficiary’s use inside the trust, yet still keep the funds totally protected from future creditors, lawsuits, and/or divorce.

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

To avoid disqualifying an individual with special needs from receiving government benefits, you would create a “special needs” trust to receive the proceeds. In this way, the money will not go directly to the beneficiary upon your death, but be managed by the trustee you name and dispersed 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 child 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 child 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. Consult with us as  to be sure 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  Planning Session today.

This article is a service of attorney Myrna Serrano Setty. Myrna doesn’t just draft documents. Myrna ensures you make informed and empowered decisions about life and death, for yourself and the people you love. That’s why our firm offers 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.

Call us today at (813) 514-2946 to schedule a  Planning Session. Ask how you can get this valuable session at no charge.

Part 1: Questions to Consider When Choosing Life Insurance Beneficiaries

Part 1: Questions to Consider When Choosing Life Insurance Beneficiaries

Choosing a beneficiary for your life insurance policy sounds pretty straightforward. You’re just deciding who will receive the policy’s proceeds when you die, right?

But it’s a bit more complicated than that. Keep in mind that naming someone as your life insurance beneficiary really has nothing to do with you. Why? Because you should consider how that money will affect your beneficiary’s life once you’re gone.

It’s very likely that if you’ve purchased life insurance, you did so to make someone’s  life better or easier in some way. But unless you consider all of the unique circumstances involved with your choice, you might actually end up creating additional problems for your loved ones.

Here are a few important questions you should ask yourself when choosing your life insurance beneficiary:

What are your goals? 

The first thing to consider is the “real” reason you’re buying life insurance. On the surface, the reason may simply be because it’s the responsible thing for adults to do. But we recommend you dig deeper to discover what you ultimately intend to accomplish with your life insurance.

Are you married and looking to replace your income for your spouse and kids after death? Are you single without kids and just trying to cover the costs of your funeral? Are you leaving behind money for your grand-kids’ college fund? Are you intending to make sure your business continues after you’re gone? Or will your life insurance cover a future estate-tax burden?

The real reason you’re investing in life insurance is something only you can answer. The answer is critical, because it is what determines how much and what kind of life insurance you should have in the first place. And by first clearly understanding what you’re actually intending  to accomplish with the policy, you’ll be in a much better position to make your ultimate decision—who to choose as beneficiary.

What are your beneficiary options?

Your insurance company will ask you to name your top choice to get the money after your death. This is the primary beneficiary. If you fail to name a beneficiary, the insurance company will distribute the proceeds to your estate upon your death. If your estate is the beneficiary of your life insurance, that means a probate court judge will direct where your insurance money goes at the completion of the probate process.

And this process can tie your life insurance proceeds up in court for months or even years. To keep this from happening to your loved ones, be sure to name at least one primary beneficiary.

In case your primary beneficiary dies before you, you should also name at least one contingent (alternate) beneficiary. For maximum protection, you should probably name more than one contingent beneficiary in case both your primary and secondary choices have died before you. Yet, even these seemingly straightforward choices are often more complicated than they appear due to the options available.

For example, you can name multiple primary beneficiaries, like your children, and have the proceeds divided among them in whatever way you wish. Also, the beneficiary doesn’t necessarily have to be a person. You can name a charity, nonprofit, or business as the primary (or contingent) beneficiary.

When choosing your beneficiaries, you should ultimately base your decision on which person(s) or organization(s) you think would most benefit from the money. In general, you can designate one or more of the following examples as beneficiaries:

  • One person
  • Two or more people (you decide how money is split among them)
  • A trust you’ve created
  • Your estate
  • A charity, nonprofit, or business

Do you have minor children?

If you name a minor child as a primary or contingent beneficiary (and he or she ends up receiving the policy proceeds), a legal guardian must be appointed to manage the funds until the child comes of age. This can lead to numerous complications (which we’ll discuss in detail next week in Part Two), so you should definitely consult with an experienced estate planning attorney if you’re considering this option.

Does your state have community-property laws?

If you’re married, you’ll likely choose your spouse as the primary beneficiary. But unless you live in a state with community-property laws, you can technically choose anyone: a close friend, your favorite charity, or simply the person you think needs the money most.

That said, if you do live in a community-property state, your spouse is entitled to the policy proceeds and will have to sign a form waiving his or her rights to the insurance money  if you want to name someone else as beneficiary. Currently, community-property states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.

Next week, we’ll continue with Part Two in this series discussing the remaining three questions to consider when naming beneficiaries for your life insurance policy.

 

The Law Firm of Myrna Serrano Setty, P.A. can guide you to make informed, educated, and empowered choices to plan for yourself and the ones you love most. Contact us today to get started with a Planning Session.

Myrna doesn’t just draft documents, she ensures you make informed and empowered decisions about life and death, for yourself and the people you love. That’s why we offer a 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 Planning Session and mention this article to find out how to get this valuable session at no charge.

FAQs: Personal Liability Umbrella Insurance

It’s no secret that we live in a lawsuit-crazy culture. It’s especially true if you have substantial wealth, but even people with relatively few assets can end up in court.

If you’re sued, your traditional homeowner’s and/or auto insurance will likely offer you some liability coverage. But those policies only protect you up to certain limits before they max out. So you should consider adding an extra layer of protection by investing in personal liability umbrella insurance.

What is umbrella insurance?

Umbrella insurance offers a backup level of protection against lawsuits above and beyond what’s covered by your homeowners, auto, watercraft, and/or other personal insurance policies. For example, if someone gets hurt at your house, they might sue you for their medical bills and lost wages. Your homeowner’s insurance will cover you up to a certain dollar amount, but you’re personally liable for anything beyond that limit. That’s where the umbrella insurance kicks in.

Once your underlying insurance maxes out, the umbrella policy will help pay for the damages and legal expenses if you lose the case. If you win, it can help cover your lawyer’s fees.

Who should buy it?

Umbrella insurance is very important for people that have a high net worth. But since everyone has the potential to be sued, it’s a good idea even for those without substantial assets to consider umbrella insurance.

If you’re sued and lose, the judgment against you may exceed the value of your current assets. In that case, a court could let the plaintiff go after your future earnings, potentially garnishing your wages for years. So umbrella insurance not only protects your current assets, but your future ones as well.

How much coverage do I need?

Most people will be adequately covered with a $1 million umbrella policy. If you earn more than $100,000 a year or have more than $1 million in assets, you may want to invest in additional coverage.

A good rule of thumb is to buy an umbrella policy with coverage limits that are at least equal to your net worth.

How much does umbrella insurance cost?

Umbrella insurance is fairly inexpensive. You can buy a $1 million umbrella liability policy for between $150 and $300 per year. An additional million in coverage will run you about $1oo and roughly $50 for every million beyond that.

Umbrella policies are inexpensive because they only go into effect after your underlying homeowners or auto policy is exhausted. In light of this, most insurers require you to have at least $250,000 in liability on your auto policy and $300,000 on your homeowner’s policy before they’ll sell you a $1 million umbrella policy.

How can I buy umbrella insurance?

Many times you can buy an umbrella policy from the same insurance company you use for your other policies. And you might even be eligible for a discount for bundling those policies.

Umbrella insurance is one of the many ways that you can protect your family’s current and future wealth. For help in evaluating your family’s situation and for help getting the best plans in place to protect what you’ve worked so hard for, contact our office.

This article is a service of Myrna Serrano Setty, P.A. We don’t just draft documents, we help you make informed and empowered decisions about life and death, for your sake and your loved ones. That’s why we offer a Planning Session, during which you’ll get more financially organized than you’ve ever been before, and make the best choices for the people you love. You can begin by calling our office today to schedule a Planning Session and mention this article to find out how to get this $500 session for FREE.