It may have been some time since you nominated the beneficiaries of your life insurance policy. Perhaps you had named your spouse, children, grandchildren, or a charity. Who are the primary beneficiaries and who are the contingent beneficiaries? It's important to revisit your policies from time to time to make sure the persons named still reflect your intent.
Life insurance policies,
annuities, pensions and retirement assets, are all examples of payable-on-death
(POD) instruments, the proceeds of which are distributed to the beneficiaries named in the
instrument, and not by a Will. Therefore, POD instruments are not part of the
probate estate. This is an important distinction, because named beneficiaries on your life
insurance policy will have priority over any beneficiaries designated in your Will. If there were to be a conflict between the Will and POD instrument, the terms of the
POD would govern.
For example, if your
Will states that your two children will inherit the estate assets in equal
shares, but your life insurance has designated only the oldest child as
beneficiary--guess what? The younger child will not share in the life insurance
proceeds, as those proceeds are not disposed of by the Will. Of course, both
children will still inherit probate assets, per the terms of the Will.
You can name any
"legal person" as a beneficiary. This can be individuals, charities,
the trustee of your trust, or your estate. However, naming your estate as a beneficiary
is not a good idea. Life insurance proceeds becoming part of your estate would
become subject to creditor claims against the estate, whereas proceeds paid
directly to your beneficiaries are protected by law and unreachable by your
creditors.
One advantage of an insurance beneficiary designation is that the distribution of proceeds is much faster than distribution of probate assets. After the death of the policy-holder, the personal representative contacts the insurance carrier and submits proof of death, usually a certified copy of the death certificate. After that, the company issues funds to the beneficiaries, sometimes within a matter of weeks.
It is important to name contingent beneficiaries in your policy to ensure someone receives proceeds in the event your primary beneficiaries do not survive you. If your primary beneficiaries die before you, and there are no named contingent beneficiaries, the insurance carrier may be forced to distribute the proceeds to the "default" beneficiary stated in the terms of the policy. This default beneficiary is often your estate, which as noted above, may not bring a good outcome.
If you become divorced, it would be wise to remove your ex-spouse's name from the policy, unless for some reason you still want that person to be a beneficiary. Divorce, in and of itself, does not revoke the beneficiary designation. The insurance company doesn't care whether or not you are still married; they pay out to the named beneficiary who is still living, and your ex-spouse would receive the proceeds.
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Reviewing the beneficiaries named in your life insurance policies and other POD accounts is an important bit of financial housekeeping and should be done every so often, particularly when family dynamics change. It's a good idea to consult with a qualified estate planning attorney to help you best manage your assets.