Insurance Laws Regarding Beneficiaries

Life insurance can help you make certain that the goals you hoped to accomplish for your family or others happens whether you're alive or not. In order to leave your funds to a specific person, you name them as a beneficiary to your life insurance policy. If you have a trust, you can also name the trust and let it pay for the things you felt were important.

Insurable Interest

When you first apply for a life insurance policy, you name a beneficiary. According to life insurance law, that beneficiary must have an insurable interest. This means, they could suffer a financial loss if you die. Business partners, corporations that depend on your work, family members and life partners all have that type of interest. If you name anyone that doesn't have an insurable interest, the life insurance company can't accept it. Once the insurance company issues the policy, however, you can change the named beneficiary to anyone you select, even Rover.

Incontestable

You can't contest a named beneficiary of a life insurance policy, unlike the heir in a will. The insurance company has an obligation to pay the named beneficiary. Even if the insured wrote his desires elsewhere, such as in a will, or told other people the life insurance company only acts on the written instructions sent to them and pays the person named as beneficiary.

Per Stirpes vs. Equally with Rights of Survivorship

You can divide the life insurance proceeds by percentages or equally when you have several beneficiaries. If you want the family of a deceased beneficiary to have his share of the funds, use a "per stirpes" designation and his share passes to his lineage. The terminology "equally with rights of survivorship" means only the surviving beneficiaries divide the funds.

Bypass Probate

Naming a beneficiary, rather than your estate helps to avoid state inheritance or state estate tax in some states. Some states don't include life insurance proceeds that go directly to a named beneficiary in the taxable estate. The funds are still subject to federal estate tax, however. Life insurance policies allow you to name one or several primary beneficiaries and secondary beneficiaries. If the primary beneficiary dies before you do; the secondary or contingent beneficiary receives the funds. If you don't have a beneficiary, the money goes to your estate and becomes a probate asset, taking valuable time before distribution.

Children

If you name children as your beneficiaries, word it correctly and include unborn children as well so you don't accidently omit a child born later. Be aware that the state in which you reside may not release funds to children until they are the age of majority. Don't leave the funds to a trusted adult family member and simply hope they'll use it for the children. The funds become theirs to use in any way they choose. Some states allow you to name a custodian for the funds in your beneficiary designation so the money is available for use when the children are young. The court has to approve the expenditures, however. A life insurance trust with a named trustee directs the use of the money according to your wishes.

Spendthrift Clause and Protection from Creditors

Life insurance companies often write the spendthrift clause automatically into the life insurance beneficiary wording. The clause prevents creditors of the beneficiary from attaching the proceeds by taking legal action to secure the funds. The life insurance proceeds also receive protection from attachment by debtors of the insured. They go directly to the beneficiary, regardless of how much money the insured owes others.

Reference:

Personal experience as a licensed life insurance rep from 1979 until my retirement in 2007
Lawyers.com:Does Insurance Money Need to go Through Probate?
http://wills-probate.lawyers.com/wills-probate/Does-Insurance-Money-Need-to-go-Through-Probate.html
OPM.gov: Insurance Operations
http://www.opm.gov/insure/life/faq/faqs-12.asp#3.1
Yahoo,com: How to Guide: Name Beneficiaries
http://finance.yahoo.com/how-to-guide/retirement/18440
Kpers.org: Naming Your Beneficiary
http://www.kpers.org/namingyourbeneficiary.htm
LawInfo: Naming Children as Beneficiaries
http://resources.lawinfo.com/en/Articles/Estate-Planning/Federal/naming-children-as-life-insurance-beneficiari.html

NAIFAs Advisor Today: The Basics of Life Insurance Settlement Agreements
http://www.advisortoday.com/archives/article.cfm?articleID=560
No Life Insurance: Life Insurance Beneficiaries [http://nolifeinsurancetm.com/life_insurance_beneficiary/]