Who Can I Name as a Beneficiary on My Life Insurance Policy?

Wondering who you can name as a beneficiary on your life insurance policy? A beneficiary is usually the person or people who will receive your life insurance payout after you die, but it can also be a trust, charity or your estate. Read this blog post to learn more.

First off, great job on buying life insurance! You took an important step by protecting the ones you love.

Every life insurance policy requires you to name a beneficiary. A life insurance beneficiary is typically the person or people who get the payout on your life insurance policy after you die; it may also be a trust, charity or your estate.

You can also name more than one beneficiary, as well as the percentage of the payout you want to go to each one—for instance, you could designate 50% to a spouse and 50% to an adult child.

You’ll typically be asked to pick two kinds of beneficiaries: a primary and a secondary. The secondary beneficiary (also called a “contingent beneficiary”) receives the payout if the primary beneficiary is deceased.

Providing for Kids
A big reason why people buy life insurance is to provide for children left behind. Usually this is done by making the surviving spouse or partner who cares for and is raising the kids the beneficiary. But what if you’re widowed or—God forbid—-both you and your partner pass away at the same time?

First, know that it’s not a good idea to name a minor as a beneficiary. That’s because the law forbids life insurance payouts to anyone who has not reached the age of majority, which is 18 to 21 depending on your state. If a child were to be named, then it would be turned over to probate court. The court will name a guardian who has oversight of the money/estate until the child comes of age.

Fortunately, there are two options. The first is to name an adult custodian. The custodian should be someone you can trust to use the money for things like housing, health care, and education until the child reaches the age of majority. At that point, any remaining money gets turned over the child and they can spend it any way they want.

The second option is to work with an attorney to set up a trust. In this scenario, the trust is the beneficiary and a trustee is named to manage and distribute the funds. The main advantage of a trust over naming a custodian is having more control.

A trust lets you specify how you want the money distributed—and it lets you do so even when your kids are adults. (One quick word of caution: Definitely consult with an attorney if you’re setting up a trust for a special needs child. They can help you create one that doesn’t impact your child’s eligibility for government assistance like Medicaid or Supplemental Security Income.)

Naming a Charity
Do you have a cause that’s near and dear to your heart? If so, you might consider naming a charitable organization as the beneficiary of your life insurance.

There are several ways to do this. They include naming the charity as a beneficiary on a new or existing life insurance policy, making the charity both the owner and the beneficiary of a life insurance policy, adding a charitable-giving rider to a life insurance policy, or working with a community foundation to figure out the best way to distribute a payout.

Final Tips
Think carefully about naming your estate as a beneficiary. This can trigger a long and costly legal process known as probate. A faster and more efficient solution is to name specific individuals or organizations as beneficiaries.

1. Get specific. Instead of naming “my spouse” or “my children” as beneficiaries, list their names along with their addresses and Social Security numbers. This saves a lot of time since the insurance company doesn’t have to track down information.

2. Always name a contingent beneficiary. Passing away and leaving behind life insurance without a living beneficiary could mean the payout goes to someone you never wanted your policy to benefit. It could also require a court-appointed administrator to sort things out.

3. Pick trustworthy custodians and trustees. Really consider who’d you trust your child’s financial well-being with if you weren’t in the picture. Your kids may love their uncle or aunt, but is he or she mature and responsible with money? If not, pick someone else who is.

4. Regularly review your beneficiaries. It’s a good idea to review your beneficiaries about once a year and after major life events like a marriage, divorce, the birth of a child, or a death in the family.

5. Communicate your wishes. Let your beneficiaries know your intentions and how to find the policy.

6. Be aware of special situations. There are some situations that could trigger a tax on the life insurance benefit—for instance, when the policyholder and the insured aren’t the same person. Likewise, things can get sticky if you live in a community property state and don’t name your spouse as a beneficiary. An insurance agent can give you life insurance advice on this and much more.

SOURCE: Austin, A. (29 April 2019) "Who Can I Name as a Beneficiary on My Life Insurance Policy?" (Web Blog Post). Retrieved from https://lifehappens.org/blog/who-can-i-name-as-a-beneficiary-on-my-life-insurance-policy/

Losing by Winning, Case Offers Harsh Reminder Concerning Preventable Expenses

The circumstances behind a recent court decision were typical, and their consequences painfully predictable. Although the plan administrator “won,” that victory does not reflect the huge—and entirely unnecessary—cost to the plan sponsor in terms of overhead and legal fees.

Herring v. Campbell was a fight over who would receive the retirement benefits accrued by John Wayne Hunter, a participant in an ERISA-governed plan. When Mr. Hunter died, he left behind a $300,000 account balance. Although he had properly designated a beneficiary (his wife), she died before he did. And because he had never designated a new beneficiary, it fell to the plan administrator to choose between the two parties who claimed Mr. Hunter’s benefits.

The plan document included a fairly typical list of default beneficiaries. These were, in order of priority, Mr. Hunter’s surviving spouse, his children, his parents, his brothers and sisters, and his estate. Mr. Hunter left no spouse, no natural or adopted children, and no parents. He was, however, survived by two stepsons and six siblings. The plan administrator therefore had to decide which of these two groups was entitled to split Mr. Hunter’s money. If the stepsons were his “children” under the plan, they would be his beneficiaries. If not, then his siblings would receive the benefit.

The plan’s ambiguity as to the definition of this single word (children) caused the administrator and sponsor to be dragged into court. The litigation lasted several years, leading all the way to the United States Court of Appeals for the Fifth Circuit—just one step short of the Supreme Court.

None of this was necessary. Here were the entirely preventable steps in this matter:

  • First, the administrator considered and rejected the stepsons' (weak) claim that they were entitled to the $300,000 under the Texas probate law doctrine of "equitable adoption." She instead distributed the account, in equal shares, to Mr. Hunter's siblings.
  • The stepsons appealed the decision. The plan administrator reviewed the appeal and again denied their claim.
  • The stepsons then moved their claim to federal court, and the trial judge ruled in their favor.
  • The plan administrator filed a motion for reconsideration, which the trial-court judge denied.
  • The administrator was therefore forced to file her own appeal in the Fifth Circuit, where a three-judge panel reversed the district court's ruling, bringing the matter full circle.

The fact that the second-highest court in the land vindicated the administrator’s decision is of little comfort to the administrator, who spent years on an entirely pointless legal battle in which she had no real stake. Nor was being right on the law any comfort to the plan sponsor, which had to pay the (presumably massive) legal fees and court costs in both the federal district court and the Fifth Circuit.

In other words, the interesting legal issues in this case (for example, the proper standard for reviewing a plan administrator’s decision when the plan document is silent about something) are beside the point. Rather, the lesson is that the entire conflict could have been avoided by simply stating, in the plan document, that stepchildren either are or are not “children” for purposes of determining a beneficiary when a participant dies without designating one.

Plan sponsors should review their plans’ default beneficiary provisions and see what— entirely preventable—dangers might lurk there.

Lawrence Jenab, Partner Spencer Fane Britt & Browne LLP