Life Insurance: Windfall or Minefield?

Life Insurance: Windfall or Minefield?

Many of us have life insurance and never give it a moment’s thought. It was offered to us as part of an employment package, or recommended to us when we got married, bought a house or had a child; another of life’s milestones and an acceptance of the responsibilities of adulthood. We feel secure that for a reasonable sum paid annually, our families will be provided for if the worst should happen. We renew the policy each year, never revisiting its terms or considering whether our circumstances or objectives may have changed.

In truth, however, the designation of life insurance beneficiaries is as important to your family’s future, in the event of your death, as the terms of your will. Few of us would make a will without first considering whom we want to benefit and in what manner, obtaining legal advice and then carefully reading the documents, before signing on the dotted line.  The same should hold true for life insurance.

The average life insurance beneficiary designation form is uncomplicated, but may not offer much guidance on the effect of any particular designation. In most cases, we name a spouse as primary beneficiary, or a spouse and children, or simply our children, and even, sometimes, regrettably, our “estate” or “executors”.

Depending on the circumstances prevailing at the time of your death, any of these designations may have unexpected and undesirable consequences or leave your beneficiaries in need and unable to access the funds.

Many potential problems can be avoided by following a few simple recommendations:

1. Read and understand the paperwork
   Read the beneficiary designation form carefully and be sure you understand what it says. If you have questions about it, ask your insurance agent and if he or she cannot answer your questions, ask your lawyer. Take the time to do it right.
2. Coordinate life insurance with your estate plan
   You may think that your situation is too basic to require an “estate plan”, but this assumption is very likely wrong. If you would like some control over what happens to your assets on death, you need to consider your circumstances, and understand your options. Identify your objectives and keep the big picture in mind: who is to benefit, how will they benefit, when will they benefit and what special circumstances, if any, must be borne in mind? If you do not yet have a will, now is the time. Your children need guardians. Estate planning is about taking charge of your affairs.
3. Watch your language
   Words and phrases can have legal import of which you may be unaware. Thus, if your “estate” is named as a beneficiary, the insurance proceeds will be paid to your personal representatives, forming part of your taxable estate on death. The same holds true for the words “heirs” and “next of kin”. The words “wife” or “husband” will mean your wife or husband (if any) at the time the insurance proceeds become payable. If, instead, you name your spouse personally, he or she will receive the insurance proceeds regardless of any intervening divorce. It is important to use clear, unambiguous language. Identify your beneficiaries, using full legal names, birth dates and stating their relationship to you. If your beneficiary is a trust, give the name and date of establishment of the trust, as well as the name and contact details of the trustees. Likewise, if the beneficiary is a company or a charity, full details should be provided, including name, place and date of incorporation or establishment, and registered office.
4. Stay on top of life events
   Update your beneficiary designation after the happening of any major life event, such as marriage, divorce, birth of a child, or death of a beneficiary. Your designation is not carved in stone but it has no inherent flexibility either. You must be proactive to be sure nothing comes between your intended beneficiary and your life insurance proceeds. So complete a new designation form whenever circumstances change.
5. Plan appropriately for minor children
   Never name a child as your beneficiary without considering how that child is to benefit from the funds. Where resort to insurance proceeds will be necessary for the child’s maintenance and support, consider using a discretionary trust for flexibility and always ensure a guardian has been appointed by will.
6. Have a fallback position
   Always name contingent beneficiaries to prevent insurance proceeds falling back into your estate on death. Horrible as it may be, whole families do sometimes perish together. Follow the Boy Scout motto: be prepared.

Life insurance can be a wonderful estate planning tool, but it should never be acquired in haste, nor considered once and then forgotten.