Choosing Your Beneficiaries

It may seem simple-choose those closest to you, right? There's actually a little more to it than that. Since few things are more important than providing for your loved ones' security and comfort you want to get everything just right-not to mention avoid giving the government more than you have to.

Know your options

Generally, if you name a beneficiary in your policy the money goes directly to that person or organization and doesn't go through your estate. This avoids any probate or federal estate tax payments. If you name your estate as primary beneficiary the proceeds of your policy will become part of your gross estate and possibly be subject to estate taxes.

Financial experts suggest working around this a couple of ways. You can establish a trust, and have the trust purchase the policy so the policy is not under your individual name or you can place an existing policy into an irrevocable life insurance trust. Check the government requirements on the length of time that you live after putting an existing policy into a trust, as requirements change and your policy may be taxed as though it was not in a trust.

Be clear

By wording your policy in clear and detailed terms and by making changes right away you'll eventually save your family much frustration and any other complications.

Changing or contesting someone's beneficiary status after an insured person passes away is a legal matter that can be extremely difficult, time-consuming and potentially costly. So updating a policy the moment something important changes are important to everyone involved. Remember that if you list descendants among your beneficiaries you'll need to add new children or grandchildren when they are born. Diverse and remarriage should always spur a review of your policies and beneficiaries. Even updating relatively minor points such as changing a daughter's last name upon her marriage may be forgotten. Policies should be clear-don't use terms such as "son" or "wife", write out the beneficiary's full name.

Naming your estate the beneficiary of life insurance proceeds rather than naming specific individuals is not the best decision. It means your policy must go through the probate process, which can be time consuming and may be subject to estate taxes.