Designating a Beneficiary: Safeguarding the Transition of Assets

Designating a Beneficiary - Safeguarding the Transition of Assets - The Bottoms Group

By Gary Bottoms, CLU, CHFC 

Chief Executive Officer

The details matter. Let’s put a spotlight on the importance of carefully thinking through primary and contingent beneficiary designations on individual and group life insurance coverage. Our desire is to help our clients avoid future problems. First, a little background for perspective…

I recently read that the ancient Greeks recognized that rushing to do good before understanding the whole system and all the issues relating to the problem to be solved often led to doing more harm than good.

With business succession and estate planning there is a realization that some sort of asset transition will inevitably occur. It will happen ‐ even if it’s not fun to contemplate. Dodging the thought of what could happen down the road is sometimes the result of wanting to avoid tough and maybe controversial decisions.

With life insurance that is designed to remain in effect, cash will inevitably be transferred from the insurance company to a beneficiary. For death benefit protection‐oriented life insurance, it seems reasonable to assert that the beneficiary is near the center of our thinking. Stated a little differently, 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 be paid from the date the claim was received to the date the check is released.

Nevertheless, the insurance company wants to make certain that they are distributing the proceeds properly. Therefore, they do have a high‐level process around the details of the beneficiary designation. Mistakes made at this point because of 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, then 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 because a minor generally can’t receive funds from a life insurance policy directly. Picture delivering a large check to a 10‐year old. Generally, named beneficiaries receive the proceeds directly bypassing the probate process. If the beneficiary is a minor, a court may become involved, and a guardian will 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 persons 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 to determine the identity of all the persons comprising the class. Picture someone in the claims department of the insurance company attempting to certify the identities of all children of this insured in order to properly distribute the proceeds. We live in a complex world – sometimes the answer may not be clear.

3. Name a contingent beneficiary

If the primary beneficiary is deceased, and there’s 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 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. Picture being the cause of 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 to coordinate the state 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.

Late one afternoon a few years ago, I received a call from one of our clients. He said he was having brain surgery the next morning and he wanted to “get some additional life insurance.” We practitioners sometimes get teased in all sorts of ways like this. But, as it turned out, he actually was having brain surgery the next morning, with an uncertain outcome, and 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.

Our corporate calling of helping others, along with our embedded employee benefit and life insurance specialties, intersects with our client’s desire for ongoing financial security and protection.

Gary Bottoms, CLU, CHFC

Chief Executive Officer


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