Many Minnesota residents purchase life insurance as a part of their overall estate plans. Although the purchase of life insurance is generally straightforward, people should be aware of some common pitfalls that may be encountered in designating beneficiaries.
People often operate under the assumption that their spouses will receive the proceeds of their life insurance policies, failing to designate alternate beneficiaries. The problem with this can be if the spouse dies before the person who owns the policy or if the two die at the same time. People should thus plan to include a contingent beneficiary in the event either situation occurs.
People who name children as the beneficiaries of their life insurance policies sometimes overlook the fact that the children will be unable to collect the proceeds until they are adults. To correct this problem, people may want to consider naming a trust as the designated beneficiary of the policy, with the child then designated as the beneficiary of the trust. Trusts may also be a good idea if a young adult child may be unable to handle a sudden windfall and would instead benefit by receiving the money over time. Finally, although life insurance proceeds are generally not taxable, if three parties are involved, they might be. For example, if a person takes out a policy on his or her spouse and names the child as a beneficiary, the proceeds may then be taxed.
Life insurance is normally an important part of an overall estate plan. Those who are planning the ultimate disposition of their estates should keep in mind the various scenarios that could impact their beneficiary designations. As a result, they may wish to discuss their life insurance policies and their choice of who will receive the proceeds therefrom with their estate planning attorney.
Source: The Motley Fool, “Buying Life Insurance? Don’t Make These Mistakes with Beneficiaries”, Selena Maranjian, March 6, 2015