Term life insurance


I

Igor Chudov

I am considering buying simple term life insurance. I want to buy not
too much, just enough to pay off the house if I die and maybe have a
little extra. My question is whether I can designate two beneficiaries
and not one. Let's say, 80% will go to my wife if she survives, and
otherwise to kids. 20% goes to my parents if they are alive, otherwise
to my wife, otherwise to kids. Would insurance companies underwrite
one policy like this, or I need two beneficiaries?

Also, if I designate my parents to be beneficiary, will there be any
taxes due if the amount is, say, 50k?

thanks

igor
 
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A

Alvin

Igor Chudov said:
I am considering buying simple term life insurance. I want to buy not
too much, just enough to pay off the house if I die and maybe have a
little extra. My question is whether I can designate two beneficiaries
and not one. Let's say, 80% will go to my wife if she survives, and
otherwise to kids. 20% goes to my parents if they are alive, otherwise
to my wife, otherwise to kids. Would insurance companies underwrite
one policy like this, or I need two beneficiaries?

Also, if I designate my parents to be beneficiary, will there be any
taxes due if the amount is, say, 50k?

thanks

igor
You can designate beneficiaries anyway you'd like.
Then there's the argument on who should own the policy.
If you own it the proceeds go to your estate.
If spouse owns it, it goes to her but then you couldn't name benificiaries..
I don't know if taxes would be different in each situation.
 
B

BreadWithSpam

Sure. The Owner of the policy may change the beneficiary
designations as he or she likes.

Taxes are complicated. There is no income tax due on life
insurance proceeds, but there may be estate tax due on it
depending on the ownership (not the beneficiaries!) of the
policy.
You can designate beneficiaries anyway you'd like.
Then there's the argument on who should own the policy.
If you own it the proceeds go to your estate.
If spouse owns it, it goes to her but then you couldn't name benificiaries..
I don't know if taxes would be different in each situation.
There are three people involved in a life insurance policy:
The Owner - pays the premiums, chooses the beneficiary, may cancel the policy
The Beneficiary - receives the proceeds
The Insured - the person opon whose the policy will pay out

Often two of those will be the same person, often it's not
a good idea. All three may be different people, and two
of them don't even have to be living persons (owner and
beneficiary may, for example, be a corporation or a trust).

If the owner is also the insured, when the person dies, the
proceeds get paid to the beneficiary, but the value of the
proceeds is included in valuing the deceased person's estate
for estate tax purposes. If you have a sizeable policy or
a sizeable estate, this is a very bad idea.

An alternative: set up an ILIT (Irrevocable Life Insurance
Trust) to own the policy. If it's set up and funded correctly,
the policy (and thus, the proceeds when paid on death) are not
in the deceased person's estate. Additional benefits - the
trustee may adjust the beneficiaries as appropriate and if
the trust itself is the beneficiary, the trustee may dole
out the benefit itself according to the way the trust was
set up in the first place - things like investing the proceeds
and paying out income from them to one beneficiary and leaving
the rest to another. Talk to an estate planning attorney
about this if you're serious about it. ILITs are very powerful
estate planning tools.

Usually, one does not want one's estate to be the beneficiary
of the policy, unless one doesn't want to manage beneficiary
designations in multiple places, but these days, beneficiary
designations are the fact of life for many things (ie. IRAs,
401ks, etc) regardless of one's will. If you're fairly certain
that the estate will be estate tax free, sure, the beneficiary
may be the estate and the proceeds will simply be distributed
according to the will.

Another possibility, if you're concerned about estate taxes,
again, is to have the beneficiaries be the owners of the
policy. They are then responsible for paying the premiums,
and they, as owners, may change beneficiaries as they like.
 
I

Igor Chudov

Bread, so, can I specify that a percentage of life insurance (80%) to
one person, and another percentage (20%) goes to another?

Thanks for an interesting post.

i
 
A

Alvin

Another possibility, if you're concerned about estate taxes,
again, is to have the beneficiaries be the owners of the
policy. They are then responsible for paying the premiums,
and they, as owners, may change beneficiaries as they like.
That was my choice. I owned my wife's policy and she owns mine.
I still had to pay the premiums on both :-(
One day I was sitting on the back porch and thought about it.
If I die, I can't collect.
 
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B

BreadWithSpam

Igor Chudov said:
Bread, so, can I specify that a percentage of life insurance (80%) to
one person, and another percentage (20%) goes to another?
A typical life insurance policy form will have a section
which looks like this:

Primary Beneficiary:
Name: ______ Relationship : _________ Share: ___%
Name: ______ Relationship : _________ Share: ___%
Name: ______ Relationship : _________ Share: ___%

Contingent Beneficiary:
Name: ______ Relationship : _________ Share: ___%
Name: ______ Relationship : _________ Share: ___%
Name: ______ Relationship : _________ Share: ___%

However, if the beneficiary is a trust, it'll more usually
just all go to the trust and the trust will take care of
the primary and contingent beneficiary issues itself.

Generally, unless you specify specific percentages, proceeds will
be split evenly between the primary beneficiaries. If all of
the primary beneficiaries predecease you, then it gets split
between the contingent beneficiaries. If you want more complex
management (ie. going per stirpes to decendents of one of
the primary beneficiaries, etc, you probably want a trust.
Also, if you have minor children, you very likely want a
trust as well, at least in the unfortunate event that both
you and your spouse die before the children are adults, perhaps
with a spouse as the primary beneficiary and a trust for the
kids as a contingent one).

If your estate is or is likely to be big enough that you
are concerned about estate taxes (and don't forget that
you need to factor in things like the value of your 401k,
your primary home, and, hopefully, the fact that you have
many years to keep accumulating wealth!), you may want to
talk to an attorney who specializes in estate issues, in
particular, for writing an ILIT with what's called a
"crummey provision" and choosing an appropriate trustee.
It's really not that big a deal, but it does need to be
done just right. You may be able to work with a financial
planner and/or insurance guy to decide if such a thing
makes sense for you before contacting an attorney, but
when the time comes to actually write one of these, you
really need an attorney.

Hope that helps.
 
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B

BreadWithSpam

Alvin said:
That was my choice. I owned my wife's policy and she owns mine.
I still had to pay the premiums on both :-(
One day I was sitting on the back porch and thought about it.
If I die, I can't collect.
I'm not sure if you're kidding or not. There isn't much need
to have your spouse be the owner if your spouse is also the
beneficiary, since there are no estate taxes on anything paid
out to your spouse. It's called the "unlimited marital exemption".

(just making sure)
 

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