Have the life insurance beneficiary discussion now and prevent problems down the road

By Brent Simmons

One key question about financial planning often is overlooked by most clients: To whom will you transfer your acquired income and assets at the end of your life? I know, it’s not the most comfortable topic to discuss. But it’s not enough to simply know who the intended recipients are. The question that clients must answer is: “Who are your beneficiaries?”

This is also a topic we, as brokers, don’t discuss enough with our clients. But it represents a clear opportunity for us to provide some much-needed education and reminders. So, I thought I’d share a few key tips that might be worth sharing with your clients.

Let’s start with life insurance

When clients purchase life insurance, a key question they must ask themselves is: “Who is my beneficiary?” If the client does not have someone in mind that they want to protect, they’re missing one of the key reasons for buying life insurance in the first place. I bought my first policy when I was newly married. Buying a new home or having children are other common triggers for adding life insurance because there is an increased dependence on your income. But again, it’s all about the beneficiary.

Assigning beneficiaries

So, where should clients start when thinking about their beneficiaries? Begin by asking them to take an inventory to identify their financial products that allow beneficiary designations. Financial products to review might include:

» Individual life insurance.
» Employer-sponsored life insurance.
» Retirement accounts.
» Pension plans.
» Bank accounts.
» Savings bonds.

Next, encourage clients to think about their present circumstances compared with when they first made the beneficiary designation — they should also be mindful of any recent life-changing events. For example:

» Did you make the designation when you began employment at your present company years ago?
» Are you married, or have you been divorced?
» Do you now have children and/or stepchildren?
» Has a family member recently died?
» What if something happens to your primary beneficiary?

That last question is a good one. A contingent, or secondary, beneficiary is a recipient of the proceeds if the primary beneficiary predeceases your client — and naming a contingent beneficiary may be worth considering.

Finally, clients obviously must consider who should not be named as a beneficiary. Naming minors or people with disabilities as beneficiaries may lead to a tricky situation. Assets left to a minor often require a court-appointed custodian to manage the funds. In addition, it’s important to consider that an influx of income could disqualify a person with disabilities from receiving government benefits based on a change in their financial standing.

If minors and persons with disabilities are not ideal beneficiaries, it leads us to the next question: “Who can be a beneficiary?” The answer may surprise you. Nearly any person can be named a beneficiary, even your estate. However, some providers and state laws may impose more strict requirements. Can’t think of a beneficiary at this time? There is always the possibility of naming a charity or a trust as a beneficiary. I’m sure your client’s name would look great on a local youth sports field, hospital wing or school building!

Make sure to coordinate with the estate plan

One piece that many clients often forget about when it comes to beneficiaries is coordinating the beneficiary designation with their estate plan. Although it will not overwrite a life insurance beneficiary designation, the estate plan can help to convey instructions for how the proceeds are to be distributed.

In certain instances, it may make sense to specifically name beneficiaries instead of using more broad language such as “all my children” or “wife/spouse.” This is especially important when an ex-spouse or stepchildren are part of the picture.

To save time, and make things clearer, a designation such as “all my surviving children/stepchildren” can be used. A “per stirpes” option — one in which your client’s estate is divided equally among the beneficiary’s descendants if the original beneficiary dies before your client — can be attractive when the desired outcome is for assets to pass equally among the branches of a family. This is exactly what happened to me when my mother and uncle predeceased my grandmother. Instead of my mother’s portion of the inheritance being distributed equally between her surviving brother and sister, her share was passed down equally to her children.

Depending on the size of the policy or the amount of the proceeds, incomplete or inaccurate beneficiary designations could cause delays in receiving funds or could result in unintended tax consequences for recipients. Although a surviving spouse may receive the proceeds tax-free, if a spouse is deceased at the time of the client’s death, the resulting inheritance left to an estate may result in a taxable event to remaining heirs.

Millions of dollars in life insurance proceeds are unclaimed due to beneficiaries not even knowing about the policy naming them. Many beneficiaries don’t know the insurer’s information or the location of the policy!

Are you seeing the education opportunity here? Some of it is complicated. But some of it is just a matter of sharing simple reminders. Bottom line: It is important for clients to communicate with their beneficiaries and make them aware. Reminding your clients of these beneficiary best practices can go a long way toward alleviating issues and challenges further down the road.