Who Should I Name as My Beneficiary?

Life Insurance BeneficiariesWho should you list as a beneficiary when you buy a life insurance policy?

This is an important question and the following should help guide you in making this very key decision.

What is a Life Insurance Beneficiary?

When you buy a life insurance policy, you will be asked to name a beneficiary. A beneficiary is one who will receive the death benefits and/or the cash value accumulation of the policy (only applicable for permanent insurance policies such as whole life, universal life and variable life insurance policies), upon the death of the insured person.

You have two options when choosing a beneficiary. Your first option in choosing a beneficiary can be one or more persons which could be your spouse, your eldest child, spouse and children, some other relative or any other person you designate. Your second option is to choose an entity such as your estate, a trust, or a charitable organization.

What’s the Difference between Choosing a Person or an Entity as Beneficiary?

There are differences in how the benefits will be treated by choosing a person over an entity.

Choosing a Person as Beneficiary

When you select a person as a beneficiary, all the proceeds from a life insurance policy are paid directly to that individual or apportioned to the person’s named (if more than one). The benefits paid are given as a lump sum and are not generally taxable.  A person who is the beneficiary can also spend the funds in any manner they choose.

You do not have to draw up a will to ensure they receive your life insurance benefits.  This is one nice feature about life insurance.  You get to quickly and simply name who gets the money without the need for lawyers and lawyer fees.

Additionally, you also have the option of changing the beneficiary.  However, there are two types of beneficiary types which are either revocable or irrevocable beneficiaries.  A revocable beneficiary means you can change the named beneficiary anytime during the life of the insurance policy.  An irrevocable beneficiary means that both the owner of the policy and the beneficiary must agree to make any changes to the policy beneficiary.

Choosing an Entity as a Beneficiary

Some life insurance owners may decide on an entity to act as their beneficiary.  The most common choices include the estate or a named trust, such as the family trust with a lawyer acting as trustee.

A will is normally required and recommended for this situation.  If you do not have a will, it is possible a state-appointed trustee might assume responsibility in determining how the proceeds will be doled out and to whom.  If you do draw up a will, it is also highly recommended that you keep it current and make changes as they occur.

The reasons why some people opt to use an entity as a beneficiary normally entail the following reasons:

  • To set up a trust if you have young children, or to ensure the funds are paid in a specific manner, or to be paid out when they reach a certain age.
  • To ensure that the life insurance proceeds are designated to some other party or parties.  This could be some combination where a family member, close friend and/or one or more charitable organizations are designated to receive funds which should be clearly specified in the terms of your will.
  • You may also need to name an estate as beneficiary if you have no spouse or children.

The legal aspect of how funds are distributed is also somewhat different when choosing an entity as a beneficiary. This includes:

  • All insurance proceeds are paid to the estate.  This in turn becomes part and parcel of the probate process.
  • How the money is paid will be determined by the terms you have designated in your will.
  • These insurance proceeds must also be available to creditors if there are any outstanding debts.
  • As the insurance proceeds may be distributed through probate, there are usually lawyer probate fees involved.  The amount may vary from state to state, but the maximum is usually in the neighborhood of 5% of the total amount of the estate.
  • If you wish to change your beneficiary in this instance, you will have to use your lawyer and will need to change the terms of the will.

Primary Beneficiaries vs. Contingent Beneficiaries

The difference here is quite clear.  You primary beneficiary is the person (or people) who is intended to receive the death benefit upon the insured’s death.  If things don’t go as planned, though, and the primary beneficiary(ies) predeceases the insured, or dies at the same time as the insured, for example in the case where a husband and wife are killed together in an accident, then the contingent beneficiary(ies), also known as secondary beneficiary, receives the funds.

One key point to make here is that if two or more primary beneficiaries are selected, and one or more of them is dead upon the passing of the insured person, the money will be distributed to the remaining primary beneficiaries, rather than any of the funds going to the secondary beneficiaries.

Some Key Points to Remember

It is vital that you make changes if your circumstances change.  This could especially be important in a divorce situation or if your named beneficiary dies before you do.  It is very important that you don’t procrastinate making beneficiary changes.

If you name more than one beneficiary, make sure they are individuals who are compatible because horrendous legal battles have broken out between family members who were named as beneficiaries.

Also, never buy an insurance policy as a third person, or what might be described as a 3 way policy.  What I mean is that you should never buy a policy where you become the owner of a policy but have bought the policy for another person such as your daughter, and a third individual is named as the beneficiary, such as her husband.  In this instance, it is very likely that the beneficiary will be considered as receiving a gift from the purchaser of the policy by the tax people and the proceeds will be taxed.

Give some careful thought to who you want to name as a beneficiary, and consider the pros and cons from the above information to make an informed choice.  As always, call us with any questions or for a life insurance quote at 877-996-9383.

Should I Buy Single Premium Life Insurance

If you’ve ever gotten a quote from a life insurance agent, you’ve probably been quoted monthly or annual rates.

For example a 45 year old might expect to pay $50 to $100 per month for $100,000 policy with level premiums for life.

But what if your agent came back to you and said… “OK, that will just cost $12,257.”

You, my friend, may have been quoted a single premium life insurance rate!

What is Single Premium Life Insurance?

It is just what it sounds like.  You pay one single premium, and your policy is guaranteed to offer a level death benefit for as long as you live without having to pay another premium.

It can only be used to purchase permanent policies such as guaranteed universal life or whole life.

Buying a single premium policy can offer you fantastic savings over paying premiums for the rest of your life, so if you think you’ll live a long time and can foot the bill, it could make sense for you.

The downside is that if you pay your single premium, and get hit by a truck tomorrow, you will have grossly overpaid for your life insurance, since the death benefit does not change regardless of premium mode.

Due to its high cost and the fact that you can’t get a “single premium term” policy, it’s not very commonly used, except in estate planning.

When Does a Single Premium Policy Make Sense?

Let’s compare two quotes:

  • Male, Age 40, Best Health Class Non Tobacco – For a $500,000 Policy with Guaranteed Level Premiums for Life – $2,493 per Year
  • Male, Age 40, Best Health Class Non Tobacco – For a $500,000 Policy with a Single Premium - $45,402 Single Premium

In this instance, I would say the single premium policy makes a lot of sense.  A 40 year old in great health will live on average 45 years.

So rather than paying $2,493 for 45 years, which would be over $110K, our 40 year old pays a single premium of $45,402.

Using a Single Premium Policy in Estate Planning

Ok, here comes the fun part.

If you’re an affluent individual, you’re probably aware of the estate tax laws.

Let’s assume you’re, 50 years old, in good health, married and have a net worth of $11 million dollars.  With proper estate planning, you should only have to pay estate taxes on $1 million dollars, by using both your and your spouse’s unified tax credit.

But that $1 Million is going to cost your estate $350,000!  So that last million becomes $650,000 after taxes.

Here’s an idea for you.  You won’t believe this.  Life insurance is such an incredible leveraging tool.

If you have the liquid cash to pull this off, here’s what you could do:

  1. Purchase a $1 million dollar guaranteed universal life insurance policy with a single premium of $133,114.
  2. You could have the policy owned by a life insurance trust, therefore separating the $1 million death benefit proceeds from your estate.

The results:

  • Your taxable estate would be reduced by the amount of premium you spent on life insurance, so your new taxable estate would be $866,886 and estate tax due would be $303,410.  So your estate tax is almost reduced by $50K!
  • Then your family takes your $1 million death benefit to pay the estate tax, which leaves them with $696,590.
  • Now your family inherits both your estate of $866,886 and the life insurance proceeds (after paying the taxes) of $696,590.  Add them together and that’s $1,563,476.

So the question is whether your family would prefer to have $1.5 Million or $650,000.

Of course, you could buy other amounts than $1 million of life insurance.  You could take the entire $1 million that is taxable and put that into a life insurance policy.

A $1 million premium would buy you the following amounts at the following ages:

40 years old -approx. $12 Million
50 years old – approx. $8.5 Million
60 years old – approximately $5 Million
70 years old – approximately $3 Million

To sum it up, single pay life insurance is a way to quickly reduce your taxable estate, and leverage that money into a life insurance policy whose death benefits may be estate tax free.

Alternatives to Single Pay

Since some people don’t like the idea of the single pay, but might also not like the idea of paying life insurance premiums the rest of their lives, you could look at a 10 pay policy or 20 pay policy.  These are excellent alternatives.

For a single premium life insurance quote, please call us at 877-996-9383 or get started with a quote request using our form on the right.