Life Insurance Beneficiaries
The preparation of a beneficiary designation clause in a life insurance policy is important. If no beneficiary is designated, the policy proceeds many end up going into a decedent’s estate and being distributed to unintended beneficiaries. Sometimes, the life insurance contract terms may provide that if there is no named beneficiary, the proceeds are paid to certain surviving members of a decedent's family such as a spouse or children. While this may appear reasonable, such payment does not always reflect a person's intent.
When a life insurance policy is purchased, it is important to understand the type of policy that is obtained. The most simple type of life insurance is called "term" insurance. The premium that is paid buys a certain amount of insurance, say $700,000, and the policy continues in force for a definite term, say one-year. If the insurance is not re-newed, there is no remaining value and the policy comes to an end.
"Whole life" type insurance is different because when someone pays the premium, the policy retains some value like a savings account. In these policies it is possible to fully pay for the value of the insurance over time and then not to have to continuously pay once the policy is fully paid. The insurance coverage continues until death and no further payments need to be made.
There are a number of different life insurance products and an experienced insurance professional can assist with understanding the various costs and benefits. Life insurance can provide a means to increase the value of an estate and also provide a source of liquid funds to pay after death obligations such as estate tax. The use of life insurance trusts has been a popular estate planning consideration. Since life insurance proceeds can be very large and valuable it is important to insert a beneficiary's correct name and provide for alternate an beneficiary to insure that the proper individuals will receive the life insurance proceeds.
Problems can arise when a person buys life insurance and many years pass and the beneficiary designation is forgotten. For example, a person may designate a parent as a beneficiary at a time when the person is not married. However, years later after the person is married and has children, the parent may not be the intended primary beneficiary. Moreover, the designation of the parent could be detrimental if the parent has his own large estate that may incur estate taxes.
The beneficiary designations should always be reviewed and up-dated to account for any changes and to make certain that the designations are consistent with an over-all estate plan.
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