28 August 2012 0 Comments

More On Beneficiary Designations

In my last entry I talked about simple family beneficiary designations.  Here are some more rules for both the family and more complex situations:

If you want to use a Life Insurance policy as collateral for a personal loan, do not name the lender as beneficiary.  Instead, execute a Collateral Assignment provided by the insurance company that names the lender as beneficiary only to the extent of indebtedness at the time of death.  At your death the insurance company would ask the Contingent Assignee (lender) to verify the amount due on the loan.  Their proceeds would be limited to that amount with the balance paid to the named beneficiary.

Beneficiary designations may be changed at any time by the owner of the policy prior to the death of the insured unless an “irrevocable beneficiary designation” has been requested.  In community property states, however, the insurance company may request a release from the spouse who is the current beneficiary if the spouse/owner requests a change that removes that spouse.  They do this to avoid litigation since the beneficiary/spouse actually owns 50% of the policy and could contest a death payment to another party unless he/she had signed off on the change.

Other than stated above, the beneficiary has no rights with regard to naming another beneficiary or in being notified if the policy owner changes the beneficiary to another party or fails to pay a premium when due. Therefore, if an individual wants to be certain that proceeds will be paid to them at the death of the insured, they should be assigned ownership of the policy, as only the owner possesses these rights.

The beauty of the Life Insurance contract is that the proceeds go directly from the insurance company to the person who is named as beneficiary.  All that is required is a claim form and a copy of the death certificate.  No probate records or fees are involved.  No income tax is due. Typically, the insurance company pays interest from the date of death.  The proceeds will be subject to Federal Estate Tax, but there is a way around that that I’ll be getting to soon.

…but, first I’ll deal with beneficiary designations when an employer or business entity is involved.


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