Preparing for the unexpected takes a lot of good planning. Life has a lot of variables that it can throw at you, and having a plan to deal with them, even the worst ones, will help the folks you care about and are responsible for prosper in the face of any adversity.
Life insurance is a good bulwark against uncertainty, but you shouldn’t stop with just buying it. You should also give serious thought to how proceeds from life insurance will be disbursed in the event of your untimely demise.
Buying life insurance and deciding on things like beneficiaries can be a very emotionally trying process, but the fact is that you need to take feelings out of the equation. You need to make your decisions based on logic and facts. You need to ask yourself hard questions like: Who in my family is responsible? Who can I trust? These are tough questions, but by asking them, answering them and making your decisions based upon them, you can advance your goal of providing long-term financial security for your loved ones.
One of the most important decisions you will make in purchasing a life insurance policy is who the beneficiary will be. When deciding on a beneficiary, you can pick a main beneficiary and a contingent beneficiary (this is who will receive the benefits if something happens to the main beneficiary) and you can also choose multiple primary and contingent beneficiaries, if you desire.
The beneficiary, of course, is who receives the benefits from the life insurance policy. These benefits are not subject to taxation, but if you are leaving behind a large estate, they can be counted toward an estate tax. (The estate tax currently only impacts estates of $3.5 million or more.)
While it may seem obvious that your beneficiary should be your spouse or primary heir, you should keep a few things in mind before making that default decision. The division of property after a death can sometimes bring out long-seated hostilities among family members, so you should consider carefully when naming beneficiaries. For example, if you have children from a previous marriage, you may want to name them alongside your spouse as beneficiaries in order to protect their interests. Also, if you have elderly parents you are caring for, you may want to name them as primary beneficiaries as well to protect their interests.
If you name multiple beneficiaries, you can make further specifications to the policy to have further control over how your life insurance benefits are distributed. By specifying a per capita distribution, you’ll ensure that if one of your beneficiaries dies before you do, their shares will be divided equally among the remaining beneficiaries. By specifying a per stirpes distribution, if one of your beneficiaries dies before you do, his or her shares will go to his or her heirs, rather than be redistributed among the other beneficiaries.
If you name a child under the age of 18 as a beneficiary, whoever has physical guardianship of that child will typically also have guardianship over the proceeds of the life insurance policy. If this is contrary to your wishes, you may want to consult with an estate planning attorney about setting up a trust for this child.
Once you decide who gets what, you’ll also want to decide how the money should be paid out. The standard pay out is a lump sum disbursement to the beneficiaries, but this may not be the best option. If your beneficiary is a financially irresponsible person, money that you intended to provide an income for that person and other dependents may quickly be squandered if it’s disbursed all at one time.
Life insurance options exist where you can have the benefits paid out to the beneficiary as an annuity. This may be a good strategy for you if you think that your beneficiary will not be able to handle a large amount of money all at once. If you’re going to go this route, do consider that the year immediately after your death will likely be the most financially stressful for your family, so make sure you leave enough behind to take care of funeral and other costs related to your untimely death.
Making good decisions now and being clear about them with your loved ones can prevent a lot of discord after your death, and ensure that the life insurance policy that you buy serves its intended purpose: Providing for the financial security of your loved ones after you’re gone.