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Beneficiary Designation Considerations

Author: Dick Hartzen

"Dear Lord! Please protect my insurance proceeds from attorneys, courts and bad advice from my insurance agent."
Life insurance is purchased with consideration for others. An insured is not going to receive the policy proceeds. Family members are usually the designated recipients. Selecting the way to protect these benefits requires a great deal of consideration.
1. Spouses

It is common to name a spouse as the designated beneficiary. If there are no children involved, the spouse may be the only named designee. There is no problem with this arrangement if the beneficiary survives the insured. The income tax free proceeds will be paid to the person named. The problem exists if the beneficiary predeceases the insured or dies at the same time.
Without protection against this occurrence, the prior death of the beneficiary would put the policy proceeds into the estate of the insured. That may involve taxes, court costs, attorney and accountant fees, time delay and attachment from creditors. It may even result in the policy proceeds going to the wrong person.
Secondary beneficiaries are always to be named. This does not eliminate all of the problems, but it does reduce them. Wording as Gayle Smith, wife as primary beneficiary and Judy Smith, daughter as secondary (contingent) may appear to solve a problem. The prior death of Gayle would result in the prompt payment of proceeds to Judy.
There is a possible problem to consider. What would happen if Gayle had predeceased the insured or was killed in the same accident as the insured? She did not survive the insured and the proceeds would be paid to Judy. The real problem that is caused is if Gayle outlives the insured by a short time - example two hours. The proceeds would now be payable to Gayle’s estate and not to Judy. This may have been avoided by more proper wording as Gayle Smith, spouse as primary beneficiary should she survive the insured for a period of 30 days, otherwise Judy Smith, daughter. This would delay the payment of the proceeds until the expiration of 30 days, but would solve this possible problem.
The "Uniform Simultaneous Death Act" and the "Common Disaster Provision" become important when the insured and beneficiary are killed in the same occurrence. If it can not be proven who outlived who, it is ruled that the insured outlived the beneficiary. This may become more important if there are no children involved.
Gregory Smith buys insurance and names Gayle as his sole primary beneficiary. Gayle buys insurance and names her spouse Gregory as her sole primary beneficiary. There are no children, so both name their parents as secondary (contingent) beneficiaries. If Gregory predeceases Gayle by 1 minute, both policies would pay to Gayle’s parents. His policy would not recognize his parents which would have been against his wishes. Once more, the delayed time period should be recommended. It can be 30, 60 or any number of days that are desired.
2. Children

Insurance agents often name minor children as contingent beneficiaries. It may make Gregory and Gayle feel secure to have their children named as a secondary (contingent) beneficiaries. The problem may arise in the future at the time of Gregory and Gayle’s death. No insurance company would write a check to a minor child upon the death of the insured. Court approval is required. Once again, delays and costs enter the picture.
Some large families feel that it is easier to use the term "children" as beneficiary rather than list each one. This may cause a problem with illegitimate children being entitled to a share and future children not being entitled to their share. The future children were not in existence at the time of application. This would not happen if the children were shown by name, or the wording "children born of the marriage of insured and said spouse".
An agent may suggest naming the person who will be raising the children to be named as the secondary (contingent) beneficiary. The proceeds would be paid to the person with a minimal amount of complications. However, there is no guarantee that the proceeds would be used for the children’s benefit. Well meaning people may be forced to use the proceeds for family emergencies.
3. Wills 

An insured may have a will, but it is not shown in the beneficiary section. He/she may feel that the will would be honored and there would no problem. This may be wrong. A will takes effect upon a person’s death. Beneficiaries must be chosen during the person’s life. If a will is not named in the beneficiary designation, a court may again be required. The insurer needs guidance in order to avoid a future law suit.
If the will is named in the section, the insurer will pay according to the will. This once more does not guarantee that the proceeds will be used for the desired purposes. A guardian, executor or executrix may spend the money for personal reasons. This may find them liable for damages upon discovery, but without any assets to cover the compensation. It would be unusual for the insured to request a fiduciary bond be provided from the guardian, executor or executrix.
4. Trusts

The correct solution to some of the problems can be accomplished by creating an insurance trust. A trust may be a necessity due to the amounts of insurance being purchased with minor children and spouses to protect. People are reluctant to set up trusts due to the fear of a large expense. In reality, it may result in a minimal cost. There are numerous professional trust departments available to fulfill the deceased’s wishes and provide safety for the beneficiaries.
5. Per stirpes or per capita

An insured may name adult children as primary or contingent beneficiaries. What happens if one of these children predecease the insured or dies in a common accident? Example: Gregory Smith has wife Gayle as primary beneficiary. His two children Judy and Gloria are secondary beneficiaries. Gloria is not alive at the time that Gregory and Gayle are killed. Would Gloria’s share go to her family or to the surviving daughter Judy? Once more, a court may enter the picture.
This could have been avoided by adding a few necessary words,"per stirpes" or "per capita.". If the insured wishes to have the proceeds paid to Gloria’s family in the event of her prior death, "per stirpes" added to her designation would fulfill the desire. If the insured wants the entire proceeds to be paid to his surviving daughter Judy, "per capita" should be scheduled.
6. A pseudo-trust

It may be beneficial to create a pseudo-trust with the insurance company. Policies offer many different "settlement options" that may serve the needed purpose. The most common method of settling death proceeds involves a lump sum payment. There are too many instances where this method ends with dire consequences. Proper advice from the insurance agent may recommend using the proceeds to provide for a definite period of time or a definite income. The interest only option is another method of providing a solution.
The proper beneficiary designation requires time and effort be spent by the insured, beneficiary and agent. It is not only an ethical practice, but it is also proper and professional. The beneficiaries should know about the expectations of the insured. The reason for the purchase of the life insurance should match the results.

Copyright 2009 by Richard I Hartzen. Used with permission.

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Alexandria VA 22314
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fax: 703.683.7556

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