Wednesday, June 20, 2012

How Should I Structure the Beneficiary on Life Insurance?

This is often a question that I am asked when writing a life insurance policy, and it is a good question. The answer depends on your situation. If you are using the insurance as coverage for business needs then you should probably specify the type of business coverage (key man or buy sell) and make the business owner and beneficiary. If you have a life insurance trust or any trust that will receive the death benefit from the life policy, then that trust should probably own the policy and be the beneficiary. However, the average person would usually want to make members of their immediate family the beneficiary on their life insurance policy and this is what I will address below. If you have any questions on business or trust structure for your life insurance in North Carolina, you can contact us here. I will be happy to give you a free consultation and we have a licensed North Carolina Attorney in our practice. 

Now, if you have purchased a life insurance policy to protect your family and are looking to just make your family members beneficiaries, here are a few things to consider. 

1. A life insurance policy in its simplest form is a contract between the policy owner, the insured (if different), the beneficiaries and the insurance company. Life insurance proceeds are designed to avoid the probate (court) process after death and go direct to the beneficiaries tax free. A beneficiary can be changed at any time with a simple form from the issuing company at the policy owner's discretion. The policy holder is allowed to name as many beneficiaries as math will allow, however more and more companies are requiring beneficiaries be designated in whole percentage points of at least 1%. So if a policy owner wanted to name 100 people as beneficiary at 1% each, they could so, as long as they could prove "insurable interest" with all the beneficiaries. (family needs, business needs, charity, etc.)

2. You should always name both a primary and contingent beneficiary. This will insure that if something were to happen to say you and your primary beneficiary at the same time that there would be a back up plan for who gets the proceeds of the policy. The main issue you would want to try and avoid is the proceeds being put into the estate of the insured. This scenario can lock up the money for long periods of time, eat into the money in attorney fees and does not insure that the money will be distributed according to the wishes of the insured. (Basically, the probate court would decide on the distribution and in North Carolina we are a "per stirpes" state or "per bloodline", meaning the state decides based on your closest surviving family who would get the money and that might not always be what the insured wants.)

3. Uniform Simultaneous Death Act of 1940 - If both insured and primary beneficiary die at the same the time the act allows the court to decide who lived longer. If no other proof exists proving otherwise, the court can deem that the insured lived longer and death proceeds can go to the contingent beneficiary if one exists, if there isn't a contingent the death proceeds go to the estate of the insured.

4. Common Disaster Provision - a provision in a life insurance contract , usually put in by the policy owner, that states how long a primary beneficiary must survive past the insured in order to receive the death proceeds. This is usually 10-30 days, but may go out as long as 60 or 90 days, depending on the clause. This clause is designed to protect the death benefit in the case that there was an event that causes multiple deaths of parties to the contract within a short period of time. This clause helps determine if the primary or contingent beneficiary is to receive the payout. 

5. Naming minor children might not be the best idea. Again, in NC and most other states, if a child beneficiary is under the age of 18 in NC (16 in some states, as much as 21 in some states), then the money can be put into a state directed trust and someone "per stirpes" named trustee. (again per bloodline) This trustee would then have access to this money to care for the children. (Again, this may not be in line with the wishes of the insured or children, and there is no guarantee how the money is spent on the children's care.) It is best to name an older person that you trust outside of your spouse as contingent beneficiary. It is also a great idea to have a Will that designates guardianship of your children in the event that you and your spouse both pass while the children are minors. If you live in NC and would like a free consultation on a North Carolina Will, contact us, and we can set up a time for you to have a free consultation with our Attorney.

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