Naming a beneficiary is an important right of owning assets such as life insurance, annuities and other financial instruments. Your beneficiary designation determines who will receive your benefit when you die.
Over time, events such as marriage, divorce, birth/adoption of children, or the death of a loved one may dramatically change the intent of how you want your assets transferred or produce an unpleasant surprise such as a tax liability. (Under current tax law, life insurance benefits paid to a beneficiary are generally not taxable income.)
It is important to know that your will does not override a beneficiary designation.
Choosing a beneficiary
Many policies allow for several different categories or types of beneficiaries.
- Primary beneficiary. The person or persons named will receive the benefit.
- Contingent beneficiary. If the primary beneficiary is no longer living, the benefit is paid to this person.
- Default beneficiary. If you do not name a beneficiary, policy benefits will be paid in the order stated in the policy or certificate of insurance.
- Revocable vs. irrevocable beneficiary. A revocable designation may be changed at any time by the owner of the asset. An irrevocable designation can only be changed with the consent of the beneficiary.
Naming a minor child as a beneficiary
Minors may be named as beneficiaries, but be aware that this designation raises special issues which may delay a claim payment.
Because insurance proceeds cannot be released directly to a minor, the insurance company will need proof of a court-appointed legal guardian for the minor's estate/property who can receive the insurance proceeds on the minor's behalf.
Even a surviving parent who has custody or control of the minor's well-being or living arrangements may not be authorized to collect assets on behalf of the minor. The court will ultimately decide who should be the guardian of the minor's estate.
In some instances, state law may allow an insurer to distribute small benefit amounts (typically $10,000 or less) to an adult representative of the minor through the Uniform Transfers to Minors Act (UTMA).
There may be better alternatives to naming a minor as a beneficiary. Seek the assistance of an attorney to determine what options best match your intentions. An attorney also can assist in preparing what is known as "Letters of Guardianship" for the minor's estate should you need them to petition the court.