Considerations when Picking a Beneficiary
When you designate the beneficiary of your life insurance policy, you have many people to choose from. Whether you want the proceeds to go to your spouse, children, parents, siblings or all of the above, there are some significant considerations to make.
Your Spouse as Beneficiary
Often, the spouse seems the most logical beneficiary for a life insurance policy, since they will be the ones taking care of the kids and absorbing the debt after the insured passes away. But there are some concerns when naming them. First, the death benefit will be added to their overall assets, which means it could eventually be taxed should they pass away. Another concern is that the funds will be used and there will be nothing left to pass onto your children once they’ve grown.
Your Kids as Beneficiary
Many people want to make sure their kids get some part of their legacy, and they do that through naming them as life insurance beneficiaries. But when your children are young or don’t have enough life experience to make good decisions, they might squander the proceeds before they can do anything really meaningful with them.
Your Parents as Beneficiary
If your parents are responsible for some of your debt, such as student loans and auto loans they’ve cosigned on, or if they need to pay for your funeral expenses, it can make sense to name one or both of them as beneficiary. Just remember that these assets can increase their own estates and create tax issues once they pass on.
Your Siblings as Beneficiary
Siblings can be a fitting beneficiary, especially if they are to be the custodians of your kids. You may also want a sibling to be your beneficiary if they’ll need financial assistance in caring for your mom and dad as they age. A brother or sister who has cosigned on a loan with the insured should also be considered as a beneficiary, since they will still be responsible for paying the loan after the insured passes away.
It’s never a good idea to leave your beneficiary form blank, since that can make the benefit taxable. But that doesn’t mean you’re forced to name young people who aren’t quite ready to handle an inheritance or those who might end up with taxable estates after receiving the benefit. Instead, you can choose to create a life insurance trust. Not only can you then name the trust as beneficiary, you can also give specific instructions for payout of the proceeds so that it limits younger or less responsible heirs. Even better, a trust can help ensure that every dollar of your death benefit goes directly where you want it to, rather than getting absorbed into someone else’s estate and possibly taken for taxes.
Lastly, remember to update your beneficiary every time the circumstances in your life change. Many incidents, such as divorce, loss of a parent, and the aging of your kids can affect how you want your death benefit proceeds distributed.