How to Choose Beneficiaries for Life Insurance Policies

Trust Designation vs. Individual Designation

When establishing a revocable living trust as part of your basic estate plan, it is important to update the beneficiaries of your life insurance policies. Whether you need to change primary and contingent beneficiaries generally depends on your marital status and net worth.

Updating Beneficiaries if You’re Married

If you are married and do not have an estate tax issue, you should consider naming your spouse as the primary beneficiary of your policies. This will allow your spouse easy access to cash that can be used almost immediately to pay bills. Your contingent beneficiary will typically be your revocable living trust.

Alternatively, you may consider naming your revocable living trust as the primary beneficiary of your life insurance policies so that the proceeds are transferred to a “friendly trust” (or bypass, creditor-protected, or family trust) created for your surviving spouse, ensuring the proceeds are protected from creditors, lawsuits, and a new spouse.

If you are married and have a taxable estate, consider naming your revocable living trust as the primary beneficiary of your life insurance policies. This will ensure proper use of your estate tax exemption under an AB trust system. Additionally, if your trust is named as a primary beneficiary, you will not need to name a contingent beneficiary, since the trust agreement itself will address both primary and contingent beneficiaries.

Updating Beneficiaries if You’re Single

If you are single, regardless of whether you have an estate tax issue, you should consider naming your revocable living trust as the primary beneficiary of your life insurance policies. This will ensure that all of your private beneficiaries are covered.

In other words, if one of the primary beneficiaries of your trust dies before you, the terms of your trust agreement will dictate where the deceased beneficiary’s share will go. Also, naming your trust as a primary beneficiary will ensure that a minor beneficiary’s share is handled properly without the need for guardianship or probate.

Generally, if you are single and have a taxable estate, naming your trust as a primary beneficiary will provide readily available cash to pay the tax. Otherwise, if you name individuals as direct beneficiaries, they will be able to receive the insurance proceeds and spend the money instead of setting it aside to pay the tax. This could be problematic if you do not have enough other liquid assets to pay the tax.

Creating a Necessary Life Insurance Trust

Regardless of whether you are married or single, if you have a taxable estate, you should consider creating a Necessary Life Insurance Trust, or ILIT for short, to hold and own your life insurance policies.

The ILIT will also be named as the primary beneficiary of the policies you transfer to it. This will thereby remove the value of the insurance proceeds from your estate, thus reducing or even eliminating the estate tax that would be due.

Once you determine who the beneficiaries should be, you will need to contact your life insurance company to update your beneficiary designation form.

Source: https://www.thebalancemoney.com/how-to-choose-beneficiaries-for-life-insurance-policies-3505273