Among other options such as retirement accounts and trusts, life insurance policies are one way that many people choose to leave something behind for their loved ones when they die. Life insurance can have multiple benefits for both the insured and the beneficiaries, such as avoiding probate, being available quickly, and being difficult to contest. As a result, many people decide to take out a life insurance policy, and immediately find themselves confronted with the need for choosing beneficiaries. Who should they be? Can you have more than one? What if you need to change beneficiaries? Is there anyone who cannot be named a beneficiary? To learn the answers to these questions and more, consider scheduling a consultation with an estate planning attorney at the Florida or Minnesota offices of Roulet Law Firm, P.A. by calling our Florida office at (941) 909-4644 or our Minnesota office at (763) 420-5087 today. Or, you can fill out the contact form on this page and a member of our team will contact you to schedule a meeting.
How Do I Choose a Life Insurance Beneficiary?
Choosing beneficiaries for a life insurance policy can be a complicated and difficult decision, particularly if the person taking out the policy has a large family they wish to provide for. Each person’s circumstances are unique, which means that it can be difficult for someone else to suggest who another person’s beneficiaries should be. However, there are some general questions that most people can take under consideration as they attempt to determine their best candidates for a life insurance beneficiary.
What Do You Want To Accomplish?
There are many reasons someone may decide to take out a life insurance policy and name a beneficiary. A few potential reasons include:
- Making sure the costs of the insured’s funeral are paid
- Providing money for a surviving spouse and children to replace the insured’s income
- Providing a college fund for children or grandchildren
- Covering a future estate tax expense
- Making sure the insured’s business continues after they have died
- Providing for an aging, disabled, or minor relative who cannot provide for themselves
Being clear and specific about the reason why the individual wants to purchase the life insurance policy can help them determine who should be their beneficiary.
Who Are Your Beneficiary Options?
Many married people name their spouse or children by default. Single people may name a parent or sibling. There are additional options, including any relative by blood, adoption or marriage, and close friends. A charity or other nonprofit organization may be another option. Some people even create a pet trust to take care of a beloved pet and name the trust as the beneficiary of the life insurance policy.
For many people, naming their trust as the beneficiary is a good option. The trust can be set up to both manage and protect the proceeds for a spouse and your children. The trust can be designed to provide an income stream to a surviving spouse while protecting the funds in the event your spouse remarries. The trust can also be designed to protect the funds for your kids in the event they get divorced, get sued, or have some other issue arise in their lives.
You can also use a trust to minimize, or even avoid, estate taxes on your assets; including the life insurance proceeds. For example, an irrevocable life insurance trust “ILIT” can protect the policy proceeds from estate taxes while providing the funds to a surviving spouse and your kids.
Are Any of Your Options Minors?
If one or more of the options an individual is considering as a beneficiary for a life insurance policy is a minor, the person should consider that they cannot name the minor directly. Instead, a guardian will need to be appointed to oversee the money until the minor turns 18. The guardian would then be named as the beneficiary on behalf of the minor and would turn the remaining funds over to the minor when they reach their majority.
If the holder of a life insurance policy names a minor directly as the policy’s beneficiary, the payout is likely to be delayed while the matter is taken to court to secure a guardian. Even if the child’s other parent is surviving, they may not automatically be named guardian. Therefore, it can be critical that the insured names a guardian to oversee the money if one or more of the beneficiaries is under the age of 18.
Would the Money Negatively Affect a Beneficiary?
While most people would see an inheritance of this nature as something helpful, in some cases, receiving a substantial sum of money can have a significant negative impact on the beneficiary. When considering a beneficiary, individuals may want to consider whether the beneficiary has ever struggled with:
- A substance abuse problem
- A gambling addiction
- Poor credit due to money management issues
- Significant debt owed to family members or friends that was not paid back
If a beneficiary has these or similar problems currently, or has had them in the past, a large sum of money suddenly available to them may do more harm than good. However, these may also be the people who could be most helped by the money. Therefore, individuals may want to consider creating a trust with that individual as the beneficiary, stipulating in the trust instrument when and how the money can be distributed. The holder of the life insurance policy can then name the trust as the policy’s beneficiary, and avoid giving the money directly to their struggling loved one, while still providing the benefits of an inheritance.
Is the Beneficiary Eligible for Government Benefits?
The Social Security Administration requires that Supplemental Security Income (SSI) recipients make less than $1,913 in income per month and have less than $2,000 in resources available to them. Benefits.gov indicates that Florida Medicaid recipients must make less than a certain amount per year based on family size, and the Minnesota information page from Benefits.gov indicates the same for Medicaid recipients in that state.
If the beneficiary is receiving SSI, Medicaid, or certain other government benefits, an inheritance of as little as $2,000 may be enough to deny them continued benefits. In these cases, individuals may want to consider creating a special needs trust and leaving the money to the trust to be distributed for the beneficiary’s sake. This can avoid costing the beneficiary their benefits, while still providing them with money they may need.
Does the Beneficiary Have an Insurable Interest in Your Life?
In the past, to name someone as a beneficiary on a life insurance policy, the person so named had to have an insurable interest in the insured’s life. But what does that mean? An insurable interest means that the person relies on the insured in some way that makes it more beneficial for the insured to remain alive than for them to be deceased.
While “insurable interest” is no longer a legal requirement in Florida or Minnesota, both states do require that if someone wants to take out a life insurance policy on someone else and name themselves as beneficiary, they must have an insurable interest. This can also be a good way to determine who might benefit most from being a beneficiary.
What Are the Rules for the Beneficiary of a Life Insurance Policy?
Many people believe they can simply write down someone’s name as a beneficiary and that is the end of it. Unfortunately, this is not the case. There are rules to choosing beneficiaries. Some of these rules include:
- Consent: Legally, people are required to get consent if they want to insure someone else and name themselves as beneficiary. Additionally, it is a good idea to get consent from those an individual plans to name as beneficiaries in case there are reasons they may not want to be named (such as losing government benefits).
- Pets: Pets cannot legally be named as beneficiaries. However, an individual who wishes to provide for their pet can set up a trust, name a trustee, and arrange for the trust to provide for their pet’s needs. The trust can then be named as the beneficiary on a life insurance policy.
- No beneficiary: Individuals can refuse to name a beneficiary. If they opt not to choose a beneficiary, the life insurance payout would become part of their estate and go through probate court. Probate court would then determine how to distribute the proceeds.
- Beneficiary number: Individuals can name a sole beneficiary or multiple beneficiaries. They can also have primary beneficiaries, who receive the entire payout if they survive the policyholder, and contingent beneficiaries, who receive the money if the primary beneficiary has died. If there are multiple primary or contingent beneficiaries, the insured must stipulate how to divide the proceeds between them.
- Minors as beneficiaries: While neither Florida nor Minnesota legally prohibits minors from being named as a beneficiary, individuals do need to take note that they will need to name a guardian to oversee the money until the minor turns 18.
- Manual updates: Every time an individual marries, divorces, is widowed, has or loses a child, or experiences another life change that makes it advisable to update their life insurance policy to reflect the newest and most accurate beneficiaries, they must make sure to do so. These updates are not made automatically.
Who Is Best To List as a Beneficiary?
There is no one right answer to who is best to list as a beneficiary. This decision is unique to each individual’s circumstances. Some options to consider include:
- Spouse, children, or other relatives (note that a spouse may need to sign away their rights before someone else can be named beneficiary.)
- A trust
- A charity or other nonprofit organization
- The individual’s business or other legal entity they own
- The individual’s estate (note that this gives creditors access to the proceeds, which can mean less money for loved ones)
While naming a spouse, adult child, or other relative is a straightforward beneficiary selection, choosing a beneficiary for a life insurance policy can sometimes be more complicated. Naming a minor child, a trust, or a business may activate an additional set of considerations. If you are considering such a beneficiary, Roulet Law Firm, P.A. may be able to assist you in ensuring that all appropriate steps are taken and information provided to avoid any problems with the beneficiary filing a life insurance policy claim after your death.
Can My Spouse Get the Proceeds of a Life Insurance Policy if They Are Not a Beneficiary?
Generally, life insurance passes directly to the beneficiary or beneficiaries named on the policy. However, in both Florida and Minnesota, if an individual is married and does not name their spouse as the beneficiary on a life insurance policy, they may still be entitled to some money as a result of the policy.
Florida
Florida allows spouses to take what is called an elective share. This means that even if an individual did not include their spouse in their Last Will and Testament, the spouse is entitled to 30% of certain assets from the deceased’s estate. Life insurance is partially included in this. Florida Statute 732.2035 states that the 30% includes the deceased individual's stake in the remaining cash value at the time just before their passing from any life insurance policy on their life.
What does that mean? Whole and universal life insurance policies can both build cash value (term life insurance does not), and it is this a proportion of this cash value to which the spouse may be entitled, up to the amount that their deceased spouse could have gotten if they had asked for the cash value of the policy just before their death. The surviving spouse is not entitled to the death benefit, which is the money that the named beneficiary receives. The death benefit is not reduced by any cash value to which the spouse may be entitled.
Minnesota
Minnesota has a law similar to Florida’s, allowing surviving spouses to take an elective share of their deceased’s spouse’s estate. However, it differs from the Florida law in two significant ways. The first is that the percentage of the estate that the spouse can take varies depending on how long the couple was married.
The second difference is outlined in Minnesota Statute 524.2-202, which indicates that the elective-share amount the spouse is entitled to is based on the value of the augmented estate. Ordinarily, life insurance proceeds and other non-probate assets would not be included as part of the estate, as they pass directly to the named beneficiary. For purposes of the elective-share calculations, any life insurance policies and other non-probate assets are included, as well as certain property transferred by the deceased during the marriage. This means that while the death benefit will still pass directly to the named beneficiary, the spouse’s elective share will be calculated based on including the benefit amount in the value of the estate, increasing the amount the spouse will receive.
How Do You Identify Beneficiaries?
When choosing beneficiaries, individuals should identify them as clearly as possible. An individual should not indicate “my spouse” or “my children” as their beneficiaries, as this may not be clear enough if the individual marries a second time or has one or more children from whom they are estranged. Instead, individuals should provide as much information as possible to identify their beneficiaries, including:
- Names
- Relationships to the insured
- Social Security Numbers
- Current addresses and phone numbers
- Any other information that would make it easier to find and identify the beneficiaries.
Additionally, when naming multiple primary beneficiaries, individuals should consider specifying how benefits are to be handled if one or more beneficiaries cannot be found or has died, addressing such questions as whether the missing beneficiary’s benefits should go to the other beneficiaries or to the missing beneficiary’s heirs.
Are You Struggling With Choosing Beneficiaries for Your Life Insurance Policy?
Choosing beneficiaries is not a simple financial decision. The selection can be a delicate decision that requires balancing the practicality of finances with the awareness of emotions. If you are questioning whom to name as a beneficiary, or have questions regarding how being a beneficiary may affect someone’s life, an estate planning attorney with Roulet Law Firm, P.A. may be able to assist you. To schedule a consultation, call our Florida office at (941) 909-4644 or our Minnesota office at (763) 420-5087 today. Or, you can fill out the contact form on this page and a member of our team will contact you to schedule a meeting.
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