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Designating life insurance beneficiaries correctly

Purchasing life insurance is often a straightforward task, but some California residents may be unaware of potential problems that can occur when designating their beneficiaries. Understanding the possible effects of beneficiary designation is important as policy holders may thus be able to avoid unintended consequences.

Many policy holders may think their life insurance proceeds will pass to their spouses automatically upon their deaths. It is still smart to name the spouse explicitly as the intended beneficiary to avoid problems with the policy having to go through the probate process upon the death of the owner. In addition to the spouse, an alternate beneficiary should also be named in case the spouse dies first or at the same time as the policy holder in an accident.

Naming children as beneficiaries may also involve pitfalls. A child who is a minor when the policy holder dies will be unable to receive the proceeds until reaching adulthood. It is thus wise to set up and name a trust as the beneficiary, designating the child as the beneficiary of the trust. A trust may also be a good idea if the intended beneficiary is one who would be unlikely to make wise choices if they receive a sudden windfall. Finally, avoiding possible taxes is important. Although life insurance proceeds are normally not taxable, problems may arise if a third party is involved.

Life insurance is an important component of an overall estate plan. By being aware of potential problems with beneficiary designations, policy holders can take steps to avoid them. Those who are considering the establishment of trusts in order to preserve and protect life insurance proceeds for a child or adult beneficiary may want to seek the help of an estate planning attorney.

Source: The Motley Fool, “Buying Life Insurance? Don’t Make These Mistakes with Beneficiaries”, Selena Maranjian, March 6, 2015

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