Earlier today my wife called me from the office of one of her clients. She is a self-employed book-keeper. She has several clients whose offices she goes to. Apparently, one of her clients asked a question about Life insurance.
A question is nothing more than a request for more information. In this case, the individual was not being dumb. She just had not been educated on Life insurance to the same level as many other people have.
My wife was caught off guard today. She is the bookkeeper. I am the insurance professional. She called to relay the following question. “Does a Life insurance policy require a named beneficiary?”
I have spent hundreds of hours studying the complexities of Life insurance. I have chosen to spend thousands of dollars to get the best education available for my chosen profession. As a Chartered Life Underwriter (CLU) and licensed Life and Health Insurance Counselor, I am prepared to analyse complicated Life insurance plans.
I am so prepared to discuss difficult insurance issues that I can forget that there are people who do not daily work with insurance. It is good for me to occasionally be reminded that most people need to be educated on the fundamentals of insurance before they can grasp the advanced concepts.
Beneficiary assignment is one of the most fundamental of Life insurance concepts. It is also one of the most misunderstood.
Technically, a Life insurance policy does not require you to name a beneficiary. Practically speaking is a different story.
When there is no named beneficiary, the benefit is paid to the insured’s estate. That means that it would be subject to probate. Ideally, the proceeds will be distributed according to the terms of your will. The ideal is not guaranteed.
Before your assets can be distributed according to your will, your debtors, probate attorney and court will be paid. Your heirs will divide up what is left over according to your will. If you die “intestate” (without a valid will) your Life insurance proceeds will be divided up with the rest of your estate as the courts see fit.
It is easy to avoid that from happening. All you need to do is name a person or entity as your beneficiary. Below are the three most common beneficiary assignments.
By far, the most common choice for Life insurance beneficiary is an individual person. I work, for the most part, with self-employed individuals or those who work for very small companies. Most of the life insurance policies that I have written in the past 25 years have been easy. The insureds have wanted all the proceeds to go to their spouse in a lump sum.
Occasionally, there I have worked with an individual who has children from two separate marriages. When the insured wants to leave money to multiple people, all she has to do is tell the insurance company what percent of the death benefit to give to each person.
During my sophomore year of college an individual, that I had never heard of, left my college $5,000,000. The school used that money to make improvements to the library and remodel one of the dormitories.
How the school used the money is immaterial. What matters is that the donor elected to use the money he had intended to give the college to buy a Life insurance policy and name the school as beneficiary. Instead of a few hundred thousands of dollars, the school got $5,000,000 because he elected to name the school as the beneficiary of his life insurance policy.
Your college is not the only option you can use for your beneficiary. You can name any charity that you want. There are hundreds of them out there. Every one of them would gladly accept the money from your Life insurance.
Whether you borrow money to buy your house or for business reason is meaningless. If you borrow money, it has to be paid back. If you do not do it before you die, your creditor have first claim of your assets in probate. If you want your loved ones to be able to avoid all the legal haggling, you can name your creditor as your beneficiary. If you do that, when you die, your loan will be repaid and your creditors will have no claims during probate.
I recommend this option for people whose assets are tied up in real estate or securities. It preserves your estate for your loved ones. That are not forced to sell assets at a loss in order to pay your creditors within the time that is allowed by probate.
In this post I briefly discussed the 3 most common forms of beneficiary assignment. As you can probably guess, although there is no legal reason why you cannot leave your life insurance benefits to your estate, I recommend that you decide on what you want to do with the money from your Life insurance and assign an appropriate beneficiary. There is no reason you have to allow your life insurance to be counted in your estate for probate.