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Life Insurance: Who Can Benefit and Who Can Be Named Beneficiary Category: Estate Planning

Making sure the people you care about are financially provided for in the event of your passing is one of the most loving things you can do. Life insurance is a great way to make sure this happens, and is part of any sound financial plan.

Who can benefit from life insurance?

Many different types of people can benefit from having adequate life insurance coverage. Here are a few of the most common groups:

  • Business owners. If you own a business and want to leave it to some but not all of your children, a life insurance policy can provide cash to the children who are not receiving an interest in the business, equalizing the value of each child’s inheritance. A surviving business partner can also use life insurance proceeds to buy the deceased partner’s interest from their family. That way, the deceased partner’s loved ones get the money without the surviving partner having to spend money from the business or their own pocket, and the business can continue uninterrupted.

  • Parents with young children. A life insurance policy can help pay for the expenses of raising children after their parents are deceased, reducing their guardian’s financial burden. Life insurance can also provide for a surviving parent if the deceased parent was the family’s primary source of income.

  • Anyone caring for a disabled family member. A life insurance policy can provide money for continuing care for family members with long-term disabling health conditions. However, if they are currently receiving or eligible for government assistance, you must exercise additional caution when providing them with funds from life insurance so the family member is not disqualified from receiving those benefits.

  • Charitably inclined individuals. A life insurance policy is an effective way to fund your charitable endeavors without taking away from other accounts or property that you may want to leave to your loved ones. Life insurance can enable you to leave a larger gift to the charity at your death than you would have if you had been making lifetime contributions.

  • People facing a large estate tax bill at death. If the value of all of your accounts and property is more than the lifetime exclusion amount at your death, estate tax may be due. Life insurance can provide your loved ones with cash to pay the tax. This cash can be extremely helpful if your accounts or property would be difficult to cash in or sell to pay the tax.

Importance of the Beneficiary Designation

If you have a life insurance policy, it’s crucial that you complete the beneficiary designation in a way that honors your overall wishes.

Here are some examples of what results when you list certain classes of beneficiaries:

  • No beneficiary. If you don’t fill out the beneficiary designation before you pass away, the death benefit will be distributed according to the policy’s default rules. This means the proceeds may go to your spouse or heirs (according to the plan agreement or state law) or to your estate, which will require your loved ones to go through the probate process.

  • A minor as beneficiary. Depending on your family situation, you may wish to leave the money from a life insurance policy to your minor child or grandchild. However, a minor cannot legally own or control their money. This means a court would have to select someone else to hold the money on their behalf until they turn 18 (the age of majority in California). At that time, the money would be turned over in full to the beneficiary, who would be able to spend it however they choose with no protections.

  • An adult as beneficiary. An adult can, of course, receive the money from a life insurance policy immediately. However, this still may not be ideal. After the adult beneficiary receives the money, they can spend it on whatever they choose. It could also be taken by a divorcing spouse or become subject to collection for an outstanding debt or judgement. In short: the money may not last very long.

  • A trust as beneficiary. This option allows the money from the life insurance to be paid to the trustee of the trust along with instructions for how and for whom the trustee is to use the money. Additional provisions can be added to the trust to increase protections against creditors, divorcing spouses, and predators, and to ensure that the trust beneficiary benefits from the money.

  • A charity as beneficiary. Naming a charity as a beneficiary means that the death benefit will be immediately paid to the charity upon your death. This timing can be helpful if the charity needs the money quickly or for a large project.

What next?

Call Santaella Legal Group today to schedule an appointment to discuss your estate plan. If you already have life insurance, we’ll review the beneficiary designation with you to make sure that it fits your ultimate goals. If you don’t have life insurance or think you need more, we can help discuss your options. We’re dedicated to helping you create a comprehensive financial and estate plan that works in your best interest and honors your wishes.

Call Santaella Legal Group, serving San Ramon, Danville, Dublin, Pleasanton & the Tri-Valley area, at (925) 831-4840 to set up a consultation.

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