When talking with your clients about life insurance issues, one of your responsibilities as an advisor is to ensure that policy benefits will be paid in accordance with your client’s wishes.
There are a number of factors to consider in ensuring that this will be the case.
One point to address is the importance of designating both primary and contingent beneficiaries. Assuming that the primary beneficiary is a spouse, there are unfortunate scenarios in which, for example, both spouses might perish in the same accident. If there is only a primary beneficiary, the benefits could end up as part of the policyholder’s estate – and this could have negative tax implications.
As an advisor, it’s your job to help clients understand the legal responsibilities of the insurer. For example, insurers are legally obligated to the highest class of named beneficiary. If payments are made in installments and the beneficiary of the higher class then dies, remaining payments will be made to his or her estate rather than to the next class of beneficiary.
Remind your clients that courts look to the name of the beneficiary in settling insurance cases and not the relationship. Therefore, it’s critical that your clients make sure to change beneficiaries in the event of significant life changes such as marriage, divorce or the birth of a child. It is also wise to avoid designating the beneficiary by “husband” or “wife” rather than by name. In the case of remarriage, the ambiguity could lead to litigation.
When it comes to children, it’s best to name each child individually. This avoids the chance of excluding any child born after the beneficiary form is signed. If the policy states “children” as the beneficiary, confusion and legal troubles could potentially arise as the definition could include illegitimate children, legally adopted children, children from prior marriages or even a child born after the insured’s death. In some states, children born out of wedlock would be excluded unless they are specifically named as beneficiaries in the policy.
Should the beneficiaries be minor children, your clients might consider naming a trust as the beneficiary as insurance benefits cannot be paid out to a minor. This type of designation offers the ultimate in flexibility and offers the added benefit of increasing the likelihood that monies will be properly invested and managed.
If your client names a corporation, partnership, limited liability company or charity as a beneficiary, you’ll need to remind them to specify the full legal name of the entity. Whatever the case, you’ll need to make sure that your client has taken the issue of beneficiary into full account. Specificity is the key to making sure the client’s wishes are carried out.
For more information, please read:
How to manage 11 different life insurance beneficiary issues | LifeHealthPro