Beneficiary designations.
Naming a beneficiary, and how to do it
Using a legal trust as beneficiary

Specifically naming someone means the money can go straight to him or her, rather than through your estate - thus avoiding potential probate taxes, expenses, and legal battles. The beneficiary you designate can be any legally competent person or an entity - spouse, children, other friends and relatives, or a trust, a charity, a church, etc. It is important that you name a beneficiary and do it properly to make sure that the money ends up where you intended it to go.

Having a will is not good enough - you still need to designate a beneficiary for your life insurance policy proceeds (the money, or death benefit.) Insurance policies and proceeds have nothing to do with your will. This is because a will only applies to your "probate estate," which includes assets other than life insurance -- investments, savings, or real estate, for example.

Your probate estate is subject to taxes, creditors (debt such as loans and credit cards) and other expenses that might greatly lower the amount of money your spouse, children or other heirs receive. And the probate process can take many months. If your spouse or other heirs have no money while your estate is in probate, they might not be able to pay household expenses and maintain their quality of life. This is what life insurance is meant to prevent. The money goes directly to the beneficiary, without going through probate at all.

Be careful if you are in a community property state - Arizona, California, Idaho, Nevada, New Mexico, Texas, Washington, or Wisconsin - where your spouse is legally entitled to half of everything.

If you give someone a power of attorney (the legal right to act for you), be sure to mention if the insurance policy is within his or her authority.

Don't forget to review your beneficiary designations every once in a while, and especially after major life events like births, deaths, weddings, divorces, graduations and retirements.

Think carefully about who to name as beneficiary, and be sure to think about and name a secondary (contingent) beneficiary, too -- the person who gets the money if the first person you name (primary beneficiary) dies before you or maybe at the same time (for example, in a car accident.) While it is common to name family members as beneficiaries, you don't have to. The most important thing is to think about your beneficiary decisions while keeping in mind the big picture of all your assets and financial planning. It may help to talk to an estate planner, accountant or attorney.

When designating a beneficiary (or beneficiaries -- you can name as many as you want, and the money can be divided among them), you have to do it correctly. Spelling out people's full names and their relationship to you is important -- after all, there are lots of Mrs. Smith's out there, like mothers, aunts, wives, ex-wives and daughters-in-law. Using their social security numbers removes all doubt about your intentions, so that you can be sure your wishes are carried out.

The beneficiary designation is also the place to indicate how you want the money divided. This can get complicated if a spouse has children from another marriage, or if one of your children dies before you, leaving grandchildren, etc. This is why it is extremely important for you to be specific in your beneficiary designation.

Don't use exact dollar amounts, which can get outdated. Instead, use percentages, such as 50% (be sure they add up to 100%) or terms such as "evenly divided among."

You should not name your estate as beneficiary, since that opens up all the probate problems -- taxes, delays, legal questions, debts -- that life insurance is meant to avoid.

You also may not want to name minor children (under the age of 18 or 21, depending on where you live) as beneficiaries, since they will need a legal guardian appointed by the court to manage their money.

You can use a trust as beneficiary. A trust is a legal document that transfers money from one person (the grantor) to another person (the trustee) or institution (such as a bank) to be managed for the benefit of a third person (the beneficiary.) Trusts are particularly useful if you want to provide for minor children, disabled relatives, or people who might be legally incompetent to manage money themselves.

Two key types of trusts are living trusts, which you create during your lifetime, and testamentary trusts, which are part of your will and don't take effect until after you die. For life insurance purposes, a living trust is best, since it avoids the probate process that your will and other assets must go through. If you decide to name a trust as beneficiary, be sure that an actual legal trust document has been drawn up for you by a lawyer, or the insurance proceeds (money) can not be paid to the trust.