Carlton Financial Group - Insurance, IRAs, College Planning and more

For most people, the beneficiary designation is one of the easiest questions on a life insurance application. However, there are a few common mistakes we see on a regular basis and your agent may not be aware of how to correctly structure your beneficiary and ownership designations to accomplish your goals.

1. Ownership: who owns the policy?

If you own the life insurance policy, you may face a federal estate tax. Your estate is a compilation of: your investment and retirement accounts, property you own, inherited assets, life insurance, etc. If your estate already exceeds the federal estate tax exclusion (currently set at $3.5 million and $1 million in 2011) then this information is especially pertinent.

The easiest solution is to have your policy owned by a trust or another adult beneficiary. In cases when we work with income replacement policies for married couples, we usually structure it to where each spouse if the owner of each others policy. This is only a short term fix with the disclaimer that we will need to set up a trust in the near future to meet your long-term needs.

2. Naming your estate as the beneficiary

If the life insurance proceeds are named to your estate, you have most likely and unintentionally created the following issues:

• Incurring an estate tax. Most people think that life insurance is a tax free benefit, which is only half true. Life insurance is income tax-free but not exempt from the estate tax.

• Proceeds from the life insurance policy are probated and then distributed, which is another reason why we recommend a trust!

• Offers no protection from creditors

All of the previously noted issues wastes time and money, creates unnecessary aggravation, and immediately diminishes the value of what you pass on to your intended heirs.

3. Name contingent (back-up) beneficiaries

Most people list only one beneficiary which should be avoided. If something happens to the insured and their beneficiary (at the same time), the proceeds will be made payable to the insurer’s estate.  By naming contingent beneficiaries, the proceeds may then be made payable to a person who you would like to have inherited the estate if something happened to your primary beneficiary. However, these proceeds will cut out the estate tax while saving the beneficiary’s time and money fighting with probate courts. Only placing one beneficiary on your policy is virtually naming the IRS as the contingent or backup beneficiary.  This not only applies to life insurance, but to annuities, IRA's, 401(k)s, SEP', 403(b)s, mutual funds, bank accounts, etc. Please note that these backup beneficiary accounts may be referred to as “payable on death” or “transfer on death” (POD/TOD) accounts instead of “naming a beneficiary”.

4. Failure to review policies

Most people take out life insurance to take care of the people they love after they pass away; however, most people seldom review their coverage on a routine basis. Policies shall be reviewed as time elapses and lives evolve.  Initial drafts may or may not include the potential settings: ex-spouses, future children, deceased beneficiaries, dramatic health changes, and so on. Not reviewing your life insurance program can result in failing to meet the demands of your current needs.

Ensure you are getting sound advice for your specific situation. Life insurance is a product to help maintain the quality of life for which you are accustomed, preserve a successful business venture, replace a key employee, alleviate an estate tax burden, and/or preserve your legacy. Make sure it is working with you, not against you.