Live Insurance Benificiaries and Wills and Trusts

Some assets avoid probate without even being in a living trust. In fact, for many people, death triggers one of their estate’s most valuable assets, life insurance. Life insurance unfortunately is all to often forgotten when couples divorce and remarry other people.

Let’s put this into a useful framework. John and Jane think they are in love; they get married. While married, John takes out a $500,000.00 life insurance policy, he names Jane the beneficiary. He also writes a will, giving his whole estate to Jane. They then realize they never really loved each other, and divorce after less than a year of marriage.

Three years later, John meets Jill. They fall in love, and this time, it is the real deal. They have three kids under the age of five, and enjoy marital bliss. John knew the divorce removed his ex-wife from receiving under the will, and writes a new will, giving all his estate to Jill. As always happens in these hypotheticals, tragedy strikes, John is ran over by a heard of angry rhinos and despite thousands of dollars of medical treatment, he dies.

Jill goes to collect the life insurance to pay the funeral costs and medical bills, the life insurance company refuses her request while writing a check to Jane.

Outrageous right?!?! But Jill was his true love! She has to pay for his medical bills! And what about those kids! All good points, but all irrelevant. Divorce does not change the name of a beneficiary.

Changing the name of a beneficiary is not a difficult process. A phone call, a few clicks at the computer, a signature, mere minutes really. But, without those few moments, Jill will not take any part of the life insurance proceeds.

So let’s look more closely at beneficiaries for life insurance. There are two types, revocable and irrevocable. The only practical difference is you can change a revocable beneficiary at any time, while a irrevocable beneficiary must give written consent for a change in beneficiary to take place.

There are three levels of beneficiary.

The primary beneficiary is the first person the proceeds would flow to. The secondary beneficiary receives the proceeds if they survive both you and the primary beneficiary. By law, there is no limit to the number of beneficiaries you may have, however, various company policies may limit this. Final beneficiaries receive the proceeds only if they outlive the primary and secondary beneficiary. Often, the final beneficiary will be a charity.

The benefit of having multiple levels of beneficiary is to avoid having the proceeds flow into your estate. If only a primary beneficiary was named, and that person was dead, the assets would flow into the estate, and then be subject the lengthy process of probate or distribution, whereas a beneficiary need only bring proof of passing to collect. In addition, the proceeds could potentially push your estate into higher taxes rates.

Wills and trusts are critical in proper estate planning, however there are other matters to tend to as well. A good estate planning attorney can help ensure all such loose ends are properly addressed.