Life Insurance & Contingent Beneficiaries
Life doesn’t always go as planned. When you married, you did the responsible thing and purchased life insurance policies for both you and your spouse (if you’re young and recently married, check out some helpful insurance tips). Each of you named the other as beneficiary, ensuring that no matter who passed away first, the survivor would be taken care of.
At least, that was the plan.
But life has a way of changing even the best-laid plans. Your family expands to include three more. Then, your spouse becomes ill and passes away. You file a life insurance claim and receive the policy’s death benefit. You do your best to carry on as a widow or widower and single parent of three children.
You continue to pay the premiums on your policy because you know now more than ever how important life insurance is.
However, you forget one important detail…updating your beneficiary designation.
Life insurance proceeds paid directly to a beneficiary are generally tax free and available relatively quickly after death. Not having a living beneficiary listed on your policy changes everything. The death benefit proceeds are paid to your estate if all listed beneficiaries die before you.
Because of this, all life insurance proceeds now must go through probate along with your other assets. Check with your tax and legal adviser about your specific situations. Those proceeds could be subject to state and federal taxes, and any outstanding debts to creditors may be subtracted before your children can access any of it. If your debts are high enough, they could receive nothing.
Generally, probate takes both time and money. Meanwhile, your children are responsible for your final expenses while waiting to receive any benefits that remain from your estate.
This is why naming a contingent beneficiary is so critical. A contingent beneficiary is the person who will receive the death benefit if the primary beneficiary dies before the insured. Naming a contingent beneficiary on your life insurance policy can save your family added stress during an already emotional and difficult time.
You can name more than one, so all three of your children can be listed as contingent beneficiaries on your policy. In the event of your death, all three will split the death benefit equally. It’s important to note that life insurance proceeds cannot be paid directly to a minor, so it’s also a good idea to appoint a guardian to manage the funds if any of your children are under 18 at the time of your death.
While planning for the end of life may be difficult to face, having your financial affairs in order can be a loving gift to leave your family.
This post has been adapted from the original by Ann S. Binzer at The Cincinnati Insurance Companies.