What is a Beneficiary?
This may be an odd quote to choose to open up with for discussion of a beneficiary…
“I had an inheritance from my father,
It was the moon and the sun.
And though I roam all over the world,
The spending of it’s never done.”
Ernest Hemingway, For Whom the Bell Tolls
A famous wartime novel that explores the tragedies thereof and leaves the readers on a cliffhanger of certain death for one, and uncertain life for many others. But here is the gamble, he knows he is going to die, but can he live long enough to save the people he loves. The beneficiaries of his sacrifice may live on indefinitely through the hero’s action. See what I did there? I’m so smooth.
Luckily for us, our lives are less dramatic! But they could be nearly as impactful. This post isn’t about how to live your life, but by making end of life decisions now you could set up generations of people by how you designate your death benefits to your beneficiaries. And in more ways than one, that will make you a hero to them.
Life insurance offers a safety net for your loved ones, ensuring their financial security in the event of your passing. Central to this process is the concept of beneficiaries. A beneficiary in a life insurance policy is the person(s) or entity designated to receive the death benefit when the insured individual passes away. The death benefit is the sum of money paid out by the insurance company to the beneficiary upon the insured’s death. Designating a beneficiary is a crucial aspect of life insurance planning.
1. What is a Beneficiary?
A beneficiary is an individual/s or entity designated by the policyholder (the insured person) to receive the death benefit of a life insurance policy upon the insured’s death. This designation ensures that the policy’s proceeds are distributed according to the insured’s wishes and serves as a vital part of the life insurance planning process.
2. Importance of Designating a Beneficiary
Designating a beneficiary is a critical decision that allows you to ensure that the financial protection provided by the life insurance policy reaches the people or causes you care about most. It can provide for your loved ones’ needs, whether it’s covering immediate expenses, supporting long-term financial goals, or contributing to a charitable cause.
3. Accessing the Death Benefit: Options for Beneficiaries
After the insured individual’s passing, beneficiaries have several options for accessing the life insurance proceeds:
Lump-Sum Payment: This is the most common option, where beneficiaries receive the entire death benefit as a single lump-sum payment. This immediate access to funds can help cover immediate expenses, such as funeral costs or outstanding debts.
Installments or Regular Payments: Some policies allow beneficiaries to receive the death benefit in regular installments over time. This can provide a steady income stream, helping beneficiaries manage their finances over the long term.
Annuity: An annuity involves receiving a series of payments at regular intervals, often on a monthly basis. Annuities can provide a consistent source of income and may be structured to last for a specified period or even a beneficiary’s lifetime.
Interest Income: Instead of withdrawing the entire death benefit upfront, beneficiaries can opt to receive the benefits as interest income generated by the death benefit amount. This approach preserves the principal while generating regular income.
Specific Instructions: In some cases, the insured might leave specific instructions regarding how the death benefit should be utilized. For instance, they may direct a portion of the benefit to be used for educational expenses or to support a charitable organization. Some may put a minimum age limit to receive the money, say age 30, which the insurance company would then continue to hold the money until the age specified is reached.
4. Trust a Beneficiary
Spendthrift Clause: In the context of life insurance, a spendthrift clause prevents creditors from accessing the death benefit paid to the beneficiary upon the policyholder’s passing. This is particularly valuable in situations where beneficiaries may be facing financial difficulties or legal obligations that could lead to creditors attempting to claim the insurance proceeds.
By including a spendthrift clause, or spendthrift trust, in a life insurance policy or trust, the policyholder can create a shield of protection around the intended beneficiaries’ financial future. It establishes a legal barrier that prevents creditors from attaching the policy’s death benefit to satisfy outstanding debts or claims. Or maybe a family member with bad spending habit or addictions could benefit from not having access to large amounts of cash all of a sudden.
The policyholder gets to decide when, what circumstances, and how much go to the beneficiary, so it can almost act as an annuity in some cases. Example; $5000, every six months, with the ability to access X amount more for medical expenses. This will have some variance between insurance companies. The idea behind this clause is to help get the beneficiaries life into order.
It’s important to note that the specific laws and regulations surrounding spendthrift clauses may vary depending on the jurisdiction. Additionally, while a spendthrift clause offers protection against most creditors, there are exceptions, such as child support or alimony obligations.
5. Considerations and Seeking Professional Guidance
The choice of how beneficiaries access the death benefit can have implications for taxes, potential growth, and financial planning. It’s essential for beneficiaries to carefully consider their own financial needs, goals, and the specific terms of the life insurance policy.
It’s important to note that the beneficiary’s choice of accessing the death benefit may have implications for taxes and potential financial growth. Since we focus on high cash value life insurance, it is likely that we will have a large death benefit pass to our beneficiaries. It is a good idea to have an estate plan to encourage your beneficiaries to seek financial and tax professional assistance. Feel free to book a meeting with us if you are not sure where to start.
Additionally, it’s crucial to keep beneficiary designations up to date, especially if there are changes in the beneficiary’s circumstances, such as marriage, divorce, birth, or death. Regularly reviewing and updating beneficiary information ensures that the life insurance proceeds are distributed accurately and in line with the insured’s wishes.
Conclusion
Designating beneficiaries for your life insurance policy empowers you to ensure your loved ones are provided for in the event of your passing. Understanding the various ways beneficiaries can access the death benefit allows them to make informed decisions that align with their financial objectives and circumstances. Consulting with financial advisors or life insurance professionals can provide valuable guidance to beneficiaries as they navigate these choices and secure their financial future.
My sweet family
