Every solid financial plan should be built on a foundation of risk management. It’s difficult to achieve your biggest life goals without first minimizing the risks that could threaten those goals. There may be no more catastrophic risk than the financial fallout from an unexpected death. Life insurance is an effective tool for managing this risk because it protects your loved ones, dependents, business partners and others from financial harm if you pass away.
Life insurance benefits are often paid as a tax-free lump sum. A death benefit could provide your loved ones with much-needed liquidity and financial stability during an already difficult period.
However, it’s important to choose the right individuals as your life insurance beneficiaries. A beneficiary designation often can’t be challenged after the fact. If you accidentally forget to include someone as a beneficiary, they may have little recourse to correct the issue after you pass away.
The good news is there are many ways to include all your loved ones as beneficiaries on your life insurance policy. You can name multiple beneficiaries and split the benefit among them. You can name contingent beneficiaries in case your primary life insurance beneficiaries aren’t alive when you pass away. You can even name a trust as your beneficiary and then dictate how the funds should be managed in the trust document.
Not sure who should serve as your life insurance beneficiaries? Below are a few questions to ask yourself:
Who depends on you for financial support?
At its core, life insurance is meant to help your dependents overcome financial difficulties created by your death. Think about who depends on you for financial support. Your spouse may be somewhat dependent on your income, and may have difficulty paying bills or maintaining their standard of living if you pass away. Your minor children are dependent on you for financial support.
You can designate your dependents as beneficiaries to help them with things like outstanding debt, replacement of your income, and other costs that may arise. However, you may want to think twice before naming minor children as life insurance beneficiaries. Instead, consider leaving the money to your spouse for the care of the children or setting up a trust for the benefit of the kids.
Who relies on you for non-financial support?
Even if you’re not the breadwinner in your household, your death could still cause financial hardship. For instance, maybe you provide much of the childcare while your spouse works. Perhaps you prepare meals and manage the upkeep of the home. Maybe you provide some level of income that would still be missed, even if it’s not the lion share of the household income.
Consider what your spouse may face in your absence. Would he or she have to pay for childcare? Would they need to hire help to maintain the home? Would he or she have to make sacrifices in their career to fill the void in the home? If so, your spouse may be a good choice as your life insurance beneficiary.
Also consider others who may be dependent on your for support. For example, do you provide care for an elderly parent? If you passed away, the parent may be forced to hire an in-home caretaker or even move into a facility. They may be someone to consider as a life insurance beneficiary.
Who would face legal, financial, or business hardship if you passed away?
You may have professional or financial relationships that would create challenges for others if you pass away. One example is a mortgage. If you pass away, your lender would likely want your survivors to pay the loan balance. In fact, many lenders require you to carry life insurance to cover the mortgage balance. However, that doesn’t mean your lender should be your beneficiary. Instead, consider the person who would be required to pay off the loan.
If you have business partners, they may be financially impacted by your death. You may want to explore a buy-sell agreement that provides for each partner should another partner pass away. These agreements are often funded by life insurance. They can be complex, so you may want to consult with a financial professional.
Ready to develop your life insurance protection strategy? Let’s talk about it. Contact us today at Intelliplan Financial. We can help you analyze your needs and develop a plan. Let’s connect soon and start the conversation.
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