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At Insurance Specialists Inc., when you sign up for a life insurance policy, the most important decision you’ll have to make (beyond what policy you’re purchasing) is who you will name as your beneficiary. When you pass away, a life insurance policy pays out the value of the policy to an individual you indicate, known as the beneficiary, and you’ll want to make sure you name the right person. After all, you buy life insurance to protect your loved ones financially, so you’ll want to ensure they receive this financial backing.

Who Should You Name?

Your beneficiary can be anyone who you love, trust, and want to take care of should you pass away. For most people, the beneficiary is their spouse who they wish to continue to care for, but it could also be children, parents, a brother or sister, or a best friend. Others choose to name a trust as their beneficiary in order to further protect their assets and avoid some of the taxes that beneficiaries might face. You may also choose to name more than one beneficiary and divide the proceeds of your policy however you would see fit (for example, leaving 80% to your spouse, but another 20% to your child).

You can also name a secondary beneficiary which is who will receive the payout if for some reason the primary beneficiary cannot accept it, such as they are mentally incapacitated or pass away before you. In this instance, it’s important to think about who you would want to take care of your family and your loved ones in the event both you and your primary beneficiary are no longer around. Most people choose to leave this money directly with their children or their parents, but those who have properly planned for the care of their children and loved ones will often indicate their chosen legal guardians as the secondary beneficiary.

For each beneficiary, you should give as much information as possible in order to avoid any confusion, particularly if you have a common last name or a large family. Try to give all of this information if you can:

  • Full name (including a middle name if your beneficiary has one)
  • Address
  • Date of birth
  • Relationship to you
  • Phone number
  • Percentage of the payout they should receive

Why Name a Trust?

Most people think of trusts as being a mechanism reserved exclusively for the wealthiest individuals. This is a common misconception: nearly anyone can benefit from setting up a trust, particularly young families with children. Life insurance companies won’t give a check to a minor, so naming a trust that is set up to benefit your children on your terms can help you take care of them how you would like. A trust can be designed to give your children a certain amount of money at certain points in their lives. For example, you can have a certain amount be given to them each year on their birthday, or have the trust set up to pay their college tuition.

When naming a trust, be sure to include the following information:

  • The name of the trust
  • Address
  • Tax ID Number (SSN or EIN)
  • Date of trust
  • Type of trust

Common Naming Mistakes

Not Telling the Beneficiary
This might seem like a fairly silly and surprising scenario, but it’s difficult to talk to someone you love about what will happen if you die. Nobody likes to think or talk about death, but a beneficiary who doesn’t know that they’ve been named may not be able to receive the funds that you have left them.

Forgetting to Update Beneficiaries
Life moves on, and circumstances change. This means your beneficiary info will need to be updated, most likely on a yearly basis. Did your beneficiary move over the last year? What about get a new phone number? Be sure to update this contact information, name any new beneficiaries, or change any distribution terms periodically to make sure your plan is executed to your wishes.

Not Considering Assistance
Believe it or not, benefits from a life insurance policy may disqualify your beneficiaries from any government assistance benefits they are receiving. In these cases, you might want to consider naming someone who will care for your loved ones as a beneficiary, or set up a trust for them so they can maintain their assistance while still receiving the funds you would like to give them.

Making Death Benefits Taxable
Generally, the benefits from a life insurance policy are free from federal income tax. However, in certain circumstances, these benefits could be considered a “gift” and become subject to the federal gift tax. The easiest way to avoid this is to make sure the owner of the policy and the person it covers are the same person. When the owner and insured on a policy are different, and the beneficiary is a third party, the benefits are usually seen as a gift.

For more assistance with setting up a life insurance policy to protect your loved ones, talk to the Atlanta insurance administrators at Insurance Specialists, Inc. today! Dial 888-451-0883 to schedule an appointment.