Who to Name as a Beneficiary for Your Life Insurance

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Lately, I’ve had a lot of questions from clients about life insurance policies and who to name as beneficiaries. Here’s what I tell most people to do:

Name YOUR TRUST as the beneficiary (if you have a trust)

Name YOUR SPOUSE as the beneficiary (if you don’t have a trust, but do have a spouse)
If you name your trust as the beneficiary, then the proceeds from that policy will flow into your trust, to be used for the benefit of the trust’s beneficiaries. If you are married, that would usually be for the benefit of the surviving spouse first, and, if you are not survived by your spouse, for the benefit of your children. This is most often what people want to accomplish with life insurance — to make sure that there is ready cash available for their loved ones if they die prematurely. Holding that money in trust makes sense because that way it can be managed by the Trustee and distributed according to the trust’s terms.
Example: Amy and her husband Rick created a living trust. They have two young daughters.  Each has a term life insurance policy that will pay $1 million in death benefits. Their trust is held for the benefit of the surviving spouse if one spouse dies and for the benefit of their daughters to the age of thirty if both parents die. Each of them names their family trust as the beneficiary of their life insurance policy.  If Rick dies, but Amy survives him, the $1 million in life insurance proceeds will be distributed to the trust where it will be held for Amy’s lifetime benefit. If both Rick and Amy die, but their children survive them, there will be $2 million in life insurance proceeds held in the trust for their daughters’ benefit.
Of course, that’s not always the right solution. Sometimes my clients use their life insurance policies as a way to plan for their parents or other family members in need of special help. If that’s the case, sometimes it makes sense to name an individual beneficiary that’s not a trust beneficiary for your life insurance policy.
Example: Sumaya is married and has one young son.  She and her husband have created a living trust and placed their house and their investment accounts in the trust. But Sumaya also wants to support her mother, in case her mother survives her. She purchases a life insurance policy and names her mother as the primary beneficiary of the policy and the trust as the secondary beneficiary. If Sumaya dies and is survived by her mother, the $250,000 in life insurance proceeds will go to her mother for her support and benefit. If Sumaya dies and her mother does not survive her, then the $250,000 flows into the trust for the support of her spouse and her son.