ISSUE #28
Who Should be the Beneficiary and Owner of Your Life Insurance?

At least every three years (more often is preferable), you should take a look at the adequacy (amount) of life insurance you own. At the same time, you should also look at who you’ve named as your beneficiary(ies) and check to see if they are the ones you still want – and if you’ve set things up in the right way.

There are many choices as to who should own life insurance on your life and who should be the named recipient. Typically, it’s best to use the most simple solution that provides the most for your family at the least cost and which you are most comfortable in implementing. Do not overlook settlement options in place of or in addition to more sophisticated devices such as a trust.

Here’s a quick look at just a few of the many options you have:

NAME INDIVIDUAL(S) AS RECIPIENT OF LUMP-SUM PAYMENT: Naming an individual is simple. There is no out-of-pocket cost involved. It’s easy for all parties to understand who is the beneficiary and the distribution in which he, she or they will receive it. But there may be problems if the beneficiary dies before you do. If your beneficiary is a minor or for any other reason is legally incompetent, a guardian must be appointed to receive the proceeds.

PAYMENT TO INDIVIDUAL IN FORM OF A SETTLEMENT OPTION: The election of a settlement option for a beneficiary is simple. There are no out-of-pocket costs involved in selection of a settlement option. Safety of principal is assured. Your beneficiary is relieved of management and investment responsibilities. This is a good way to provide steady and consistent income when relatively smaller amounts are involved or when a trust is contra-indicated for any reason. But the election of a settlement option—once made—typically cannot be altered even if the beneficiary’s physical condition, marital status, family situation, or financial needs change. Because monthly payments are fixed, inflation reduces the purchasing power produced by the proceeds.

PAYMENT TO YOUR ESTATE: Naming your executor as beneficiary is simple. The insurance proceeds become available to your executor immediately to pay creditors and provide cash for current bills. But this choice means the proceeds will be subject to federal estate tax regardless of who the owner was or how carefully the policy was arranged. This beneficiary designation is seldom appropriate.

Although there may be legitimate reasons for naming your estate the beneficiary of a modest amount of life insurance, as a general rule, direct payment to a named individual or trust is the more cost-effective solution.

PAYMENT OF POLICY PROCEEDS TO LIFE INSURANCE TRUST: A trust can provide for a number of contingencies such as the predecease of the primary beneficiary or the physical, mental, or emotional incompetency of any beneficiary. Professional management and investment expertise is available. Dispositive provisions can be drafted flexible enough to meet changing financial family situations. But, compared to the simplicity of naming an individual as beneficiary, this choice is relatively complex and expensive. However, a trust should be considered in every case where it is important to postpone ownership and limit control by the beneficiary. Trusts should be considered in every case where minor children or any other relative needing asset management is involved.

SHOULD YOU BE THE POLICY OWNER? The advantage is that you retain sole control over the policy and can unilaterally exercise all policy ownership rights and privileges. The downside is that the entire proceeds of the policy will be includable in your estate for federal estate tax purposes.

CONCLUSION: There is no perfect solution to the question of who should be the beneficiary or owner of a life insurance policy. Each alternative has its costs as well as its benefits. The key thing is for your planning team to consider your objectives as well as your beneficiaries’ circumstances together with the various federal and state tax implications and advantages.

AS ALWAYS, PLEASE FEEL FREE TO CALL TO DISCUSS THESE OR OTHER MATTERS OF CONCERN.

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This publication has been prepared as an educational resource to help the reader identify areas of potential concern. The publisher is not engaged in rendering legal, accounting or other professional services. The information contained in this publication should not be acted upon without first obtaining the advice of a professional advisor. Material may not be used without permission. Leimberg and LeClair, Inc.

You may wish to access NEW information this month at: www.ashland.edu/estate and “click” on “Planned Giving” in the left hand column.

Our planned giving director, Paul Ditlevson, can be of tremendous service in helping you integrate your giving goals with your overall estate plan. He can also help you prepare to visit your attorney. You can reach Mr. Ditlevson by calling 419-289-5090 or by email to pditlevs@ashland.edu or regular mail at 401 College Avenue, Ashland, OH 44805.