Who can get my life insurance money?

A common sentiment we hear from clientele involves the idea that the money paid out on life insurance policies can only go to immediate family or the estate of the insured. This is a misconception most likely bred from the fact that most people happen to leave their policy benefits to those very people. The truth is that life insurance death benefit beneficiaries can be just about anyone and actually, do not have to be people at all. There are a few frequently used methods to designate beneficiaries on policies that serve as a great example.

Charity

For those who are passionate or aligned with a charitable mission or organization, the charity of your choice can be named as the beneficiary of a life insurance policy on such a person. This is a great way to leave a legacy and also allows the donor to deduct the premiums made on the policy from their taxes as a charitable contribution. Many of the 501C3’s operating today receive continued funding from the charitable trust created, and funded, by life insurance policies on deceased supporters.

Trusts

A trust is a legal entity separate from the person who created it, known as the grantor. The grantor will set specific guidelines on how the trust is to act posthumously. The person who executes those rules, known as the trustee, is legally bound to follow. People create these entities for two primary benefits; They want to guarantee the control and use of their assets after death and they would like to remove assets from under their estate to help their heirs avoid hefty estate taxes. Life insurance proceeds can be paid out tax free to a irrevocable trust, the trust directs how and who that money is to be dispensed to.

Business

A legal business entity can also be named as the recipient of life insurance proceeds. This is common in the business world when owner’s of a business want protection from the loss of a key employee or the funding needed to purchase back shares or interest. A key employee plan is a life insurance policy on a high revenue generating employee that is payable to the business in the case of their death or disability. A buy-sell agreement or stock buy-back plan are life insurance policies on fellow shareholders or interest owners so that when that owner passes, the remaining owners can buy back the deceased’s portion of the business from their estate. These plans are typically not tax deductible to the business but are paid out on a tax free basis.

When the insured is the payor and owner of their own policy, the ability to direct who can receive those benefits is almost unencumbered. Death benefits are broken up in percentages not dollars. This means that technically a policy owner could direct benefit up to 100 different people or entities, each receiving 1% of the proceeds. Although this would be highly inefficient and ill advised, it is of course the owner’s will that is ultimately the deciding factor.