Life insurance proceeds are not traditionally considered an inheritance, but in fact it is money that is distributed to a beneficiary for their use after the death of the insured. Life insurance policies are one way to transfer money without the delay often associated with assets transferred through probate.
While life insurance policies can avoid the probate delay, there are mistakes that the policy holder can make with beneficiary designations that could cause some trouble. The first, is directly naming a minor child as the sole beneficiary.
Insurance companies won't pay out proceeds directly to the minor child, and this can result in a court-appointed guradian who will take care of the money for the child. This is not to say that a court-appointed guardian won't consider the best interests of the child, but it certainly leaves room for unintended consequences. If a policy holder wants to name a minor child, there are some simple solutions such as creating a trust or specifically naming a trusted financial custodian.
Special needs beneficiaries are another area where the best intentions could cause problems. This is an area where a discussion with an estate planning attorney is necessary. In some cases, naming the special needs child could make them ineligible for government assistance.
What about the tax consequences? Life insurance proceeds pass tax free correct? Not in every instance. Under the traditional plan, the policy holder and the insured are the same. Where the policy holder, insured and beneficiary are three different people, tax consequnces are most likely in play.
These aren't the only mistakes that can be made, but we won't be covering the rest of them in this post. Readers will have to check back in next week to hear the rest. Readers can also discuss life insurance beneficiary options with an estate planning attorney in Pennsylvania.
Source: Fox Business, "Naming Life Insurance Beneficiaries: 10 Ways to Screw Up," Barbara Marquand, May 22, 2013