If your life circumstances have changed recently (e.g., marriage, divorce, birth/adoption of a child, passing away of a loved one, or job change) you may want to review your life insurance beneficiary designations to ensure that they are accurate and up-to-date to avoid unintended consequences in the event of a life insurance claim. So that your life insurance benefits address your wishes, you should should revisit your beneficiary designations periodically to determine if they are still appropriate under the circumstances and meet your wishes for distribution of your life insurance, accidental death or other coverages. We urge you to seek the advice of an attorney in making estate and beneficiary designations. However, at a minimum you should revisit your beneficiary designations on an annual basis to determine if they still meet your wishes and circumstances.
Frequently Asked Questions
1. What does “Primary Beneficiary” mean?
The primary beneficiary is the person or persons the insured names to receive the life insurance proceeds upon his or her death.
2. What does “Contingent Beneficiary” mean?
The contingent beneficiary is the person or persons the insured names to receive the life insurance proceeds in the event the primary beneficiary passes away before, or at the same time as, the insured.
3. What if I am married, live in a Community Property state and want to name someone other than my spouse as primary beneficiary? (Community Property states: CA, NV, AZ, ID, LA, NM, TX, WA, and WI.)
Community Property states may require spousal consent if the spouse is not named as the primary beneficiary. Typically, the spouse must sign the beneficiary designation form indicating he or she agrees to not be named as primary beneficiary. Carriers often ask that this form be notarized.
4. Can minor children be named as beneficiaries?
Naming minor children as beneficiaries is not recommended. Generally, insurance companies will not pay death benefits directly to minors. The benefits would likely be held until a court-approved guardian is named, which can take several months and usually requires hiring a lawyer. However, you may consider naming a trustee of a trust for a minor as beneficiary to help ensure competent management of the proceeds. By naming a trustee of a children’s trust as beneficiary the proceeds would be managed by the trustee (person or institution) you choose. You may also set up a custodianship under the Uniform Transfers to Minors Act (UTMA). This law has been adopted by every state except Vermont and South Carolina and allows one to name an adult as “custodian” of the funds. The custodian will manage the funds and use them for the child’s benefit until a certain age, 21 in most states. Most insurance carriers are familiar with this law and are able to adjudicate claims accordingly.
5. Can the insured name his or her estate as beneficiary?
Naming an estate as beneficiary is sometimes done to help pay estate taxes and other estate settlement costs. After taxes and settlement costs, any remaining proceeds are then distributed to heirs according to the terms of your will. If you don’t have a will, state laws dictate distribution of life insurance proceeds. The disadvantage of naming an estate as the beneficiary is the life insurance proceeds may increase the amount of estate taxes payable and may be subject to probate costs and creditor claims. (Note: When no beneficiary is named, proceeds are generally paid to the estate automatically unless otherwise provided in the insurance policy.)
6. Can a will be named as the beneficiary?
If a will is named as the beneficiary, the will needs to specifically state the carrier’s named group life policy and how proceeds should be distributed. This is not advisable as your employer may switch group life carriers from time to time. A will also may need to go through probate prior to being validated.
7. Can an irrevocable trust be named as beneficiary?
When an irrevocable trust is the named beneficiary, proceeds are paid into the trust rather than your estate. If all applicable estate tax rules are met, this can result in significant estate tax savings for larger estates since the proceeds are not included in the taxable estate. Plus, when you establish the trust, you determine how proceeds are to be used. Since the trust is irrevocable, once established it cannot be altered.
8. Can you name your employer as the beneficiary?
Most states do not allow an employee to name their employer as the beneficiary of group life insurance proceeds.
9. Are group term life insurance proceeds taxable?
Group life insurance proceeds are generally not taxable to the recipient, regardless of the amount.
10. What Else Should You Be Aware of? Be aware the decisions you make will have consequences. When naming your life insurance beneficiaries remember to:
Be as clear and specific as possible to avoid ambiguity and potential conflicts.
Review and, if necessary, revise your choices regularly; especially at times in your life when circumstances change such as marriage, childbirth, divorce, career change, economic change, etc.
Talk to your attorney and/or tax advisor to discuss the consequences of your decisions.
On request, your benefits administrator can provide you with a Beneficiary Designation form.
Please note that the need for review of beneficiary designations could also be applicable to a bank account, 401k, IRA or other financial or insurance policies and accounts.
This document and the questions and answers raised are meant to encourage you to be proactive in seeking out information with which to make informed and current decisions on whom to name as beneficiaries of your life insurance. TBG West is not providing legal advice. You should consult an attorney or financial planning professional for this and other estate planning decisions.