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Beneficiaries Count Big in Your Estate Plan
When Landis Scholes, DDS, graduated from dental school in 1998, he had student loans and a mortgage—but very few assets. So he purchased a large life insurance policy and named his wife as beneficiary. “I didn’t want Amy to be saddled with debt if something happened to me,” he says.
Estate Planning Needs Grow
Dr. Scholes has come far in the past 8 years. Now the owner of a family practice in Highlands Ranch, Colorado, and the father of 2 young children, his assets have grown and so has his need for more sophisticated estate planning. “For tax reasons, and to preserve more wealth for my family, my financial planner and accountant advised me to establish a trust and to name the trust as the beneficiary of my life insurance, rather than Amy. So that’s what I did.”
Choosing a beneficiary and keeping that choice up to date are integral aspects of estate planning. Loye Guthrie, senior life insurance claims examiner at Great-West Life & Annuity Insurance Company, explains why. “Beneficiary designations generally override a will and cannot be changed by the directions of your will, so it’s vitally important that your policy’s beneficiary designation reflects your true intent,” he explains. “That’s why it’s critical to review and update your beneficiary designations periodically, and especially whenever there’s a major change in your life, such as a marriage, divorce, or birth of a child. The death of a named beneficiary should also prompt you to update your designations.”
Dr. Scholes, whose ADA-sponsored term life insurance policy is underwritten and administered by Great-West, says that the process of changing his beneficiary designation was very simple. “I called the company and they sent me a form to complete and return. I was delighted how quickly the change was made.”
Tips from an Expert
At Great-West, Guthrie offers additional tips to keep in mind when designating (or changing) a beneficiary:
Naming beneficiaries. You can name almost anyone as a beneficiary—a family member, trust, business partner, neighbor, charity, or religious organization. However, most experts recommend that you avoid naming young children as beneficiaries because a minor child cannot receive insurance proceeds outright. A better alternative may be to establish a trust to receive the proceeds of the life insurance. “Ask your professional advisor, such as an estate planning attorney, if a trust would be appropriate to your situation,” Guthrie says. For a free guide on selecting an estate planning attorney, call the ADA Insurance Plans at 888-463-4545.
Number of beneficiaries. You can name as many individuals (or entities) as beneficiaries as you wish, as long as the percentages add up to exactly 100. “We once helped a dentist list 20 different employees and family members as beneficiaries of his life insurance policy,” Guthrie reports.
Contingency planning. Consider naming a contingent (or secondary) beneficiary in addition to your primary beneficiary. The contingent beneficiary will receive the proceeds if the primary beneficiary should die before you do.
And what happens if both primary and contingent beneficiaries predecease you? “Learn your policy’s provisions for handling this situation,” Guthrie says. For example, the policy might stipulate that proceeds be paid to your estate (as with the ADA Term Life Plan), or it might specify that proceeds be paid to family members according to a line of succession established by the insurance company.
Collateral assignments. If you have used your life insurance as collateral for a loan, keep in mind that in the event of your death, the collateral assignment will supercede your beneficiary designation. In other words, the proceeds of your policy will first be used to pay the outstanding balance of your loan; any remaining money will then be paid to your beneficiaries.
“When you repay the loan, remember to notify the insurance company immediately and ask them to send you the appropriate documents to have the collateral assignment removed,” Guthrie advises. “That way, there should be no delay in verifying who should receive the proceeds at your death.”
Life insurance has long been considered a foundation for sound financial planning. “Whether the beneficiary is my wife or my trust, I ultimately want to protect my family,” says Dr. Scholes.
Editor’s note: Dr. Scholes’ statements were obtained by Great-West Life & Annuity Insurance Company, relative to his coverage under Group Policy 104TLP, and reprinted here with permission. For more information on the provisions and limitations of this policy or other group insurance available through the ADA Insurance Plans, call 1-888-463-4545 or visit www.insurance.ada.org. This article does not constitute legal advice. Please seek professional input as appropriate to your situation.