Designating a Beneficiary: Safeguarding the Transition of Assets

We have entered a period that is being referred to as The Great Wealth Transfer.? By 2045, it is expected that some $84 trillion in wealth will change hands from Baby Boomers to Gen X and millennials.?

A lot has been written about this transfer, including how life insurance can play a role in successfully transferring an estate or business.? However, there is one detail in the use of life insurance in this way that does not get enough attention - beneficiary designations.

The details matter. So today I want to put a spotlight on the importance of carefully thinking through primary and contingent beneficiary designations on individual and group life insurance coverage. My desire is to help our clients avoid future problems.

With life insurance that is designed to remain in effect until a death occurs, cash will inevitably be transferred from the insurance company to a beneficiary. For life insurance that is oriented towards death protection, the objective is to create capital for a beneficiary.

Upon the insured's death, the insurance company's objective is to distribute the death claim proceeds carefully and as quickly as possible. In our experience, the insurance company does not unduly delay the process. There's an incentive to do this because most states require interest to be paid from the date the claim was received to the date the check is released.

Nevertheless, the insurance company wants to make certain they are distributing the proceeds properly. Therefore, they have a high-level process around the details of the beneficiary designation. Mistakes made at this point due to lack of clarity are difficult to fix and litigation may occur. Picture the process of trying to sort out the cash, because of an unclear beneficiary designation, after the checks have cleared.

If the primary beneficiary is a person, and not an ongoing entity like a trust, it stands to reason that this named person may or may not be alive when the insured dies. Therefore, it is important to name a secondary contingent beneficiary. Generally, the primary beneficiary is obvious - maybe a spouse. We believe careful thought should be given to the secondary contingent beneficiary as well. Below are our top five considerations related to beneficiary designations:

1. Avoid naming a minor as beneficiary. This can be problematic. Picture delivering a large check to a 10-year-old. Generally, beneficiaries receive the proceeds directly bypassing the probate process. If the beneficiary is a minor, a court may become involved, and a guardian may be designated. Two sets of grandparents may end up in court claiming they are the best choice to handle the cash for the grandchild.
2. Avoid naming a class of beneficiaries. For example, the beneficiary may be "all children of the insured." In this case, the beneficiary is a collection of people who possess the same or common characteristics. The class could be children, grandchildren, heirs, brothers, sisters, and so forth, with no identification of individuals by name. A legal process may be involved in determining the identity of all the persons comprising the class. Imagine someone in the claims department of the insurance company attempting to certify the identities of all children of the deceased insured to properly distribute the proceeds. We live in a complex world - sometimes the answer may not be clear.
3. A carefully considered contingent beneficiary designation is important.? If the primary beneficiary is deceased, and there is no contingent beneficiary named, at best, only a delay will be involved. Among the negative outcomes is the possibility that the proceeds end up with people and places the insured did not intend to benefit.
4. Periodic reviews are wise. Divorces and other life events can bring changes that may point to the need to update beneficiary designations. Picture an ex-spouse in a contentious divorce receiving a large check, happily surprised, because the beneficiary designation was not updated to reflect the current spouse of the deceased.
5. It makes sense to create a financial advisory team. Naming your estate as a beneficiary may seem expedient when completing a life insurance application, but legal and financial advisors can help think through the alternatives and possibly avoid future problems. Here’s a hypothetical that demonstrates the potential issues at play.? What if the cause of your death is an accident that takes your life and causes harm to others. Your estate then gets sued because of your negligence. The capital created by your life insurance becomes an asset held by your estate and vulnerable to creditors. Therefore, we recommend that our clients engage an experienced estate planning attorney and/or financial advisor to coordinate the estate legal documents and all the moving parts. This may involve the creation of some sort of trust that will be a part of the overall estate plan.

A few years ago, I received a call from one of our clients. He said he was having brain surgery the next morning and, with an uncertain outcome, he wanted to make sure his insurance plans were in proper order. I retrieved his file and visited that evening with him and his primary beneficiary, his spouse, at the hospital and confirmed that everything was in order. This true story paints a vivid picture of how the beneficiary is central to the concept of life insurance. The details matter.