Potential Beneficiary Problems with Your Life Insurance

If you don't think through the implications of how you designate your life insurance beneficiaries, you can create unhappy results. Let's look at a few problems.

Often, married couples designate their spouse as the primary beneficiary and their children as contingent beneficiaries. They assume that if a spouse were to die the money goes to the surviving spouse. And, if they both die simultaneously, the benefits pass on to the children. Unfortunately two problems can arise with this designation scheme.

The first problem occurs when you and your spouse are in an accident where you die first, but a day or a month after your spouse dies. Because your spouse survived you, the death benefit goes to her not to your contingent beneficiaries. The proceeds wind up in her probate estate.

The second problem occurs when both you and your spouse die at the same time. You may think the benefit goes to the children since they're the contingent beneficiaries. But young children can’t be paid life insurance proceeds - the exact age varies with your state.

If you hadn't designated a guardian in your will - or had no will - the state would choose who the guardian will be for your children and pay the death benefit to him. The state's choice of guardian may not have been yours. So, your kids may or may not get the full benefit.

Here's another problem. Suppose only you, the wife, died. Your husband would then get the death benefit as primary beneficiary. Now suppose he later got remarried, and invested much or all that benefit into a house with the new wife.

Everything may be fine, but perhaps he ends up getting a divorce. It's not uncommon for the new ex-wife to get the house in a divorce settlement or trial. So the life insurance benefit you and your spouse calculated to benefit your family and paid the premiums for ends up benefiting a complete stranger with none of it left even for your children. Clearly, unforeseen circumstances can have appalling consequences..

Note: The purchase of life insurance involves costs, fees, expenses and potential surrender charges and depends on the health of the applicant. Not all applicants are insurable. If a policy is structured as a modified endowment contract, withdrawals will be subject to tax as ordinary income and withdrawals prior to age 59 ½ are subject to a 10% penalty.