Decision Time: Choose the Right Life Insurance Beneficiaries
Written by Kasey Ng
When purchasing a life insurance, it is important to choose the beneficiaries of your policy. There are mainly two ways of naming beneficiaries: directly name one or more people, or name a Revocable Living Trust. In addition, you can name them in order. A primary beneficiary will be the first one to receive your death benefit. If the beneficiary dies before you, the secondary will be the next in line.
A Revocable Living Trust
Many people may think that only wealthy individual need to set up a Living Trust. It is a wrong perception. A Living Trust can also be helpful for the general public. Before you make a decision on whether to set a Revocable Living Trust, here are some pros and cons of using one.
Pros
Avoiding Probate – Probate is the process by which legal title of property is transferred from the decedent's estate to his/her beneficiaries. It is complicated and often involved with lawyer and court house. With a Revocable Living Trust, beneficiaries do not have to go through the lengthy process to claim the life insurance.
Lower Cost – In the long run, having a Revocable Living Trust will cost beneficiaries less time and money because it helps you avoid a costly guardianship or conservatorship if you become disabled and time-consuming probate after you die.
Cons
Complexity of Funding a Trust – The process of funding a Trust is often painful because you need to contact all the companies to update the ownership and beneficiaries for all the assets that you have.
Your marital status
Whether you are married or single can affect your decision on choosing your life insurance beneficiaries.
Single – If you are single, you should consider setting up a Revocable Living Trust and name it as your primary beneficiary. It will insure that all beneficiaries will be covered. A Living Trust will also make sure that all taxes are paid before they are spent by the beneficiaries.
Married – If you are married, the decision will depend on whether you have an estate tax problem or not. If not, you should consider naming your spouse as the primary beneficiary so that he or she can easily access to the Living Trust. In contrast, if you do have an estate tax problem, it is better to name the Trust to be the primary beneficiary. It insures the proper use of the tax exemption under the Trust system.
Additional Concern
It may not be a good idea to name your spouse as a primary beneficiary if he or she is in debt trouble, because the proceeds are subject to the claims of your spouse’s creditors.
Besides Living Trust and individual, you can also name estate as the beneficiary. By designating your estate on your policy, the proceeds of the life insurance policy will be made payable to your estate. However, it is often not advisable to do so. One drawback is that the proceeds will be subject to creditor’s claims.
Many people may think that only wealthy individual need to set up a Living Trust. It is a wrong perception. A Living Trust can also be helpful for the general public. Before you make a decision on whether to set a Revocable Living Trust, here are some pros and cons of using one.
