We purchase term life insurance for one main reason: to insure that in the case of our death our loved ones will be taken care of, at least financially. Part of making that happen is naming your loved ones as beneficiaries in that insurance policy.
It is advisable to name more than one person as a beneficiary, in fact naming multiple beneficiaries is a smart choice.
The general practice is to name a spouse or life partner and children as your beneficiaries. Additionally, financial experts advise naming a trust as the beneficiary as well. All of these choices are complex and require specific considerations. Not taking those into account when setting your policy in place can cause expensive problems for the ones you leave behind.
Spouse: Naming a spouse is the most logical choice for a married individual. One reason is that the proceeds of life insurance (if properly set up) are generally income tax free and your spouse can easily access the funds needed to pay immediate bills.
In most cases a spouse will be able to transfer the inheritance tax free. An IRA can even be rolled over. These laws vary from state to state, so check with your lawyer or tax adviser.
It is not Estate tax free unless it goes to only the spouse (children may be subject to estate taxes). The help of a good legal adviser is recommended.
Non-spouse beneficiaries: Life partners and Non-spouse beneficiaries are now eligible for no-tax transfers in some states. Find out if your state allows for this when choosing your life partner as a beneficiary.
A Trust: Many people name a Revocable Living Trust, Credit Shelter or Family Trust as their primary benefactor. The reason for this is so that the money will be protected from creditors, or lawsuits. Again, talk to your adviser.
Children: One of the main reasons parents purchase a term life insurance policy is so that if they die before their children are able to provide for themselves, their children will have the financial means to succeed in life. With that in mind, you should take into account the consequences of handing over a large sum of money to a child. Seek advice on how best to structure the death benefit. One of the largest bills parents think of when choosing how much insurance they want to purchase is to cover college tuition. You can choose a guardian or open a trust fund for your child/ren that will distribute the proceeds according to your intentions. Since predicted the future is impossible a good option is to draw out a diagram of potential scenarios.
If you have more than one child and want to divide the money equally between your children, you’ll need to decide between dividing the proceeds per stirpes or per capita. Per stirpes means that the money will be divided by branch of the family, while per capita divides the proceeds by head.
A note of caution: Be sure that your Last Will and Testament and your designated beneficiaries don’t contradict. This can lead to a long and complicated legal process that will not only delay the funds from going where you intended, but can also result in family feuds. Talk to your insurance agent and adviser to make sure the two don’t contradict each other.