This was originally published on Monday, April 4 ,2016 in the Pacific Daily News. Click here to subscribe to the PDN.
Question: I am sixty years old and a widower. I have a mortgage which I am solely responsible for and two adult children. I have a life insurance plan through my employer. If I were to pass, I want my son to inherit my house. I was wondering if it would be possible for a portion of my life insurance to go to my two children and to my mortgage bank to ensure that the payments are made?
Answer: I commend you for taking this matter into consideration before you pass. No one likes thinking about passing on but it is very important to be prepared when it happens. Unfortunately, many families go through some bitter times trying to decide how to carry out their loved one’s final wishes. Sometimes this can cause a rift that cannot be mended. A lot of these disputes can be avoided if specific instructions were left behind. It is important that you understand your insurance policy and the parameters within that policy. When choosing your beneficiary there are several things to consider.
The proper beneficiary — Selecting a beneficiary is a very personal decision. Some people want to ensure that their loved ones have enough money to cover funeral expenses or they may want to ensure that their family can survive after they pass. Yet, some view it as a financial transaction. When choosing a beneficiary ask yourself a few questions. Who will be bearing the costs of your funeral? Who counts on you financially? Take time when choosing your beneficiary. Here are some choices to consider:
- Family – For most, this is the top of the priority list, especially for those who are financially dependent on you. Family members could include your spouse or partner, children, parents, or siblings. You can choose multiple family members as your beneficiaries. Per stripes means you can designate branches of a family or lineage and the proceeds are divided equally among the beneficiary and/or their surviving children. Let’s say that you named your son and daughter as your beneficiaries and they receive 50 percent each of the proceeds. If your son passes before you, his children will split his 50 percent equally and your daughter still receives her 50 percent. Using the same scenario, if your son had two children, then the proceeds will be divided equally between your son’s children and your daughter. The proceeds will be divided into thirds.
- Legal guardian – If you are appointing a minor (under 18 years of age) or someone who is not mentally or physically able to care for themselves as your beneficiary, you may be required to name a legal guardian. You do not have to choose the appointed legal guardian; you can request to appoint a guardian of your choice.
- Estate – You may choose your estate to be your beneficiary. You must have your last will and testament drawn and the executor of your will receive the proceeds from your life insurance policy. The executor will have to carry out the terms of your will. When you name your estate as the beneficiary, it will be the sole beneficiary of your life insurance policy. Talk with your accountant to discuss the taxes associated with your estate becoming your beneficiary.
- Trust – A trust is a legal agreement that allows a third party, or trustee, to hold assets on behalf of the beneficiary or beneficiaries. You can make the trust your life insurance beneficiary. You can specify the terms of a trust controlling when and to whom distributions may be made. A trust can also protect your estate from your heir’s creditors or from beneficiaries who may not be adept at money management.
- Charity – You can name a charity to receive some or all of your proceeds.
- Mortgage – You can make your mortgage institution a beneficiary of your life insurance policy. Be very specific about the amount and account number etc. when doing so.
Michael Camacho is president and chief executive officer of Personal Finance Center. He has more than 20 years of experience in retail banking and at financial institutions in Guam and Hawaii. If there is a topic you’d like Michael to cover, please email him at email@example.com and read past columns at the Money Matters blog at www.moneymattersguam.wordpress.com.