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When an individual purchases a life insurance policy or an investment product through a life insurance company, he or she will be asked to name a beneficiary. This can be one of the most valuable features of these products so it is important to carefully choose your beneficiary options.

Many people choose to name their “estate” as the beneficiary. Although this is an easy short term solution, it is important to review the risks of doing this. Doing so will subject the proceeds to probate fees and the benefits received will be co-mingled with all the other estate assets which may be exposed to various third parties.

Naming an individual or trust as beneficiary, will keep the proceeds out of the insured’s estate and also protect the death benefit from the claims of creditors or litigants.

If the beneficiary selected is a spouse, parent, child or grandchild, then a “preferred beneficiary” has been named and the proceeds of the life insurance product are protected against claims of the creditors or litigants of the life insured not only upon his or her death, but any cash values in that policy are also protected during the lifetime of the insured. Note that the preferred beneficiary status does not apply to siblings. Minors who are appointed as beneficiary will require a trustee for their portion until they reach the age of majority.

Think carefully about to whom you assign the task of trustee. It can be a difficult role to fill, often challenged by trying relationships. Be sure to discuss the role with your intended trustee and make sure they’re comfortable with it and understand the responsibilities of the role.

Often parents of minor children are concerned as to what would be the effect of both of them dying in a tragic accident. For this reason, the children are often named as “contingent beneficiaries” and the named trustee on their behalf will receive the proceeds directly upon the death of their parents avoiding any estate considerations.

If you have an older life insurance policy it is probably a good idea to review the named beneficiary as your circumstances may have changed. For example, if you have divorced and remarried, is your ex-spouse still named as the beneficiary? If you have a divorce agreement that required you to maintain your spouse as the beneficiary, have the conditions of that requirement now expired (e.g. children are now of age) and is no longer required? While you are doing that, it might be a good idea to ensure that if the policy was assigned to the bank or other lending institution for a loan which has now been retired that the assignment has been removed. Also, perhaps the beneficiary designation should be updated in the event of a recent change in marital status and/or dependents.

If your children are now grown up, and have families of their own, does this change how you want your life insurance proceeds to be paid? If your children are married, their spouses may have access to these proceeds too. Is their relationship solid, or is there a risk of half of your life insurance proceeds being paid out as part of a divorce settlement? Perhaps you should consider naming your grandchildren as beneficiaries instead? Often, older individuals find they have no one to whom they wish to leave their insurance proceeds. In this situation, naming a registered charity will provide a charitable tax deduction in the full amount of the proceeds at death.

A beneficiary designation is not a complicated matter, but should be given due consideration. Let’s review your beneficiary designations and make sure your life insurance proceeds end up where you want them to.