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BENEFICIARY DESIGNATION

Most people have a good idea of who they intend to name as beneficiaries, but often, beneficiary designations do not keep up with their intentions. Marital changes and changes to family status may require a change to your client’s current beneficiary designations. If no contingent beneficiary is named and the primary beneficiary predeceases your client, then payments would likely be made to the client’s estate, creating unnecessary delays and expenses.

A beneficiary omission may cause unnecessary probate costs and serious delays in the distribution of your client’s assets. If their beneficiary designations are out-of-date, they may not be passing property according to their current intentions. With a beneficiary review, you can help them identify potential problems and suggest ways to solve them. Following are some pieces to help you with that review.

Resources

Beneficiary Designation Guidelines

Checklist – Beneficiary Designation

Corebridge Beneficiary Review Training Guide

Corebridge Beneficiary Review Playbook

BENEFICIARY DESIGNATION GUIDELINES

The naming of a beneficiary is one of the most important decisions faced by owners of life insurance policies. Beneficiary designations should be considered carefully and reviewed regularly. We have developed these guidelines to help you save time and avoid delays. The examples below are suggestions only; each carrier will have their own particular guidelines.

Please note that carriers have begun asking more detailed information about beneficiaries, such as addresses and social security numbers, in an attempt to better identify and track beneficiaries. We understand that some clients may object to such inquiry, but when a beneficiary is unaware of a policy and the carrier is unable to track down the persons or entities, claims can be difficult or impossible to pay. Recent litigation brought against some life insurance carriers has made such fact-finding a necessity, and carriers now ask for more information to be in a better position to find beneficiary(ies) of a known deceased insured.

  • Estate of the Insured

    Language/Guidelines: “Estate of (full name) Insured”

    Comments: 

    • Only used in very rare situations because the designation will cause the proceeds to be subject to creditors.
    • When used, it is strongly suggested that the financial advisor document their case file that they advised the insured of the drawbacks of this designation. 
  • Spouse of the Insured

    Language/Guidelines: 

    • “(Full name of spouse) spouse of the insured.” 
    • Social security number required
  • Minor Child/Beneficiary

    Language/Guidelines: 

    • See Testamentary Trust where proceeds are paid to trust for the minor’s benefit. 
    • Uniform Transfers to Minors Act (UTMA): “(Full name of custodian) as Custodian for (full name of child) son/daughter under, under the (State) Uniform Transfers to Minors Act.”

    Comments: 

    • If the beneficiary is a minor at the insured’s death, the death benefits will not be paid directly to the minor. Instead, payment is made to someone appointed by the court to be the minor’s guardian/custodian. Instead of the expense and complexity of a court-appointed custodian, a trustee of a trust for the minor’s benefit, or a custodian under the state’s UTMA can be used. 
  • Multiple Adult Children/Beneficiaries

    If a beneficiary dies before the insured, proceeds pass equally to the surviving beneficiaries.

    Language/Guidelines: 

    Provide the following information:

    • Full name of each beneficiary
    • Relationship(s) to the insured
    • Dates of birth
    • Social security numbers
    • Current addresses

    Comments: 

    • The insured should normally be the policy owner where there are multiple beneficiaries. Having three different designations on a policy can cause adverse gift tax (e.g., having a parent as the insured, one child as the owner and multiple children as beneficiaries). While it’s possible to have the same owners and beneficiaries, any policy action where there are multiple owners will require the consent of all owners. 
    • Where there are multiple beneficiaries, proceeds are distributed to the surviving name beneficiaries in equal shares (joint with right of survivorship), except where tenants in common is requested. 
  • Multiple Beneficiaries (Tenants in Common)

    Language/Guidelines: 

    Provide the following information:

    • Full name of each beneficiary
    • Percentage allocated to each beneficiary (must add up to 100%)
    • Relationships to the insured
    • Dates of birth
    • Social security numbers
    • Current addresses

    Comments: 

    • A tenants-in-common example:
      • 50% to (name of beneficiary #1); and 50% to (name of beneficiary #2), if living, otherwise to the estate of (beneficiary #1).
    • Avoid using the terms “per capita”, “per stirpes”, and “by representation”.
    • Avoid using the terms “issue”, “heirs” and “descendants”
  • Trust Under Will (Testamentary Trust)

    Language/Guidelines: 

    (Full name of trustee) as trustee of (full name of the trust if applicable) created in the instrument admitted as my Last Will and Testament provided, should my Last Will and Testament not contain (name of the trust) or should I die intestate, then equally to my tehn-living children (name of children).

    Comments: 

    This beneficiary designation is often used for trusts established to benefit minor children. Such a trust may not exist at the insured’s death so it’s important to address this contingency with a successor beneficiary. 

  • Living Trust

    Language/Guidelines: 

    “(Full name of the trustee) as trustee of (full name of the trust) dated (date of trust).”

    Comments: 

    If the trust is established to keep the policy proceeds out of the estate of the insured(s), then the trust should also be the owner. 

  • Corporation

    Language/Guidelines: 

    “(Full name of the company) Inc., a (State) corporation.”

  • Partnership

    Language/Guidelines: 

    • “(Full name of company) LLC, a (State) partnership.
    • State of organization
  • Limited Liability Company

    Language/Guidelines: 

    • “(Full name of company) LLC, a (State) limited liability company.
    • State of organization
  • Charitable Organization

    Language/Guidelines: 

    • “(Full name of charity) LLC, a (State) corporation.
    • State of organization
  • Contingent Beneficiary

    Comments: 

    It is especially important to designate contingent beneficiary(ies) when the primary beneficiary(ies) is/are individuals. 

  • Collateral Assignment

    Language/Guidelines: A way for a lender to receive some policy death proceeds while NOT being named a beneficiary. 

    Comments: 

    A separate form is required, wherein the policy own transfers all or a portion of rights to death proceeds to an assignee or lender with the policy beneficiary receiving the balance. 

BENEFICIARY DESIGNATION CHECKLIST

The below questions are designed to help the financial advisor identify some of the frequently encountered areas where beneficiary designations can create problems.

This checklist of questions and supporting discussion points can be used when establishing beneficiary designations in the original application as well as when reviewing an existing policy designation.

  • Are the beneficiary designations clear?
    • Is each primary beneficiary clearly identified?
    • Will the beneficiary(ies) suffer a financial loss upon the death of the insured(s)? If no, carriers will not issue due to lack of insurable interest.
    • If the policy owner wants the death benefit to be divided other than equally, has each beneficiaries’ percentage interest been included and do all the beneficial interests add up to 100%?
    • If there are multiple individual beneficiaries and one or more of the beneficiaries dies before the insured, does the policy owner want the remaining surviving beneficiaries to divide the proceeds equally? (Interest is joint with right of survivorship.)
    • If no, has language been used to distribute death proceeds as tenants-in-common?
    • Are any contingent beneficiaries clearly identified?
  • Are any of the beneficiaries minors?
    • If yes, is the beneficiary designation structured as a minor trust or custodian under UTMA (Uniform Transfer to Minors Account)?
    • If no, death benefits will not be paid directly to minors. Instead, payment is made to someone appointed by the court to be the minor’s guardian/custodian. 
  • Does the policy owner live in a community property state?
    • If yes, is the spouse the beneficiary of more than 50% of the policy death benefit?
    • If no, has the spouse given written consent or is the premium paid with the policy owner’s separate property funds?
    • If no, the spouse will be considered to have made a gift to the non-spouse beneficiary(ies).
  • Are different people/entities named as insured, policy owner(s) and beneficiary(ies)?
    • If yes where the policy owner is an individual, at the insured’s death they will be considered to have made a gift to the beneficiary(ies).
    • If yes where the policy owner is a business entity, at the insured’s death there is a risk that the death proceeds may be taxable as income. 
  • Is a business a beneficiary or policy owner?
    • If yes, is the insured an “appropriate insured” under Internal Revenue Section 101(j)? (An employee at any time during the 12-month period before the insured’s death, or a director, a highly compensated employee, or a highly compensated individual at the time the contract was issued.)
    • If yes, have the notice and consent requirements been met before the policy was issued?
    • If no, the death proceeds in excess of cumulative premium payments will be subject to income tax. 
  • After the initial purchase of the policy, did the policy owner receive anything of value in exchange for changing the beneficiary or owner?
    • If yes, was the transfer to “an exempt transferee” under Internal Revenue Code Section 101(a)(2)(A) and (B)? (Transfer to the insured, a partner of the insured, a partnership in which the insured is a partner, a corporation in which the insured is an officer or shareholder, or a transfer where the transferee’s basis in the policy is determined in whole or part by reference to the basis of the transferor.)
    • If no, the death benefit will be subject to income tax at the insured’s death unless the policy is retransferred to an exempt transferee.
  • On an existing policy, does the beneficiary designation still accomplish the owner's objectives?
    • Has the beneficiary designation been reviewed recently?
    • Is the reason for having the life insurance the same as when the policy was purchased?
    • Has the number of desired beneficiaries remained the same? (Ex: Number of children increased since purchasing the policy.)
    • Is the marital status the same as when the policy was purchased?
    • Are the beneficiaries’ abilities to manage their financial affairs the same as when the policy was purchased?
    • Has the passage of time or shifting of circumstance caused the beneficiary designation to become outdated?

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