Sunday 20th April, 2008


Naming a beneficiary

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Last year in San Antonio, Texas, an insurance agent was sentenced to 15 months in a federal prison, and ordered to pay $500,000.

He had purchased life insurance on several homeless people and collected the proceeds when they died, since he had named himself as the beneficiary.

That is fraud, and is an example of how a good thing can be used for evil.

There was also a case of a childless nurse who bought life insurance for her niece and then poisoned the child, so she could collect the proceeds as the beneficiary.

These cases are also a lesson to consumers that there are several levels of care that must be exercised in managing financial matters.

The use of the beneficiary designation is a common method to transfer wealth, passing such wealth outside of the will, and thus avoiding probate fees.

Not every type of asset allows for a beneficiary to be named, but where it can be used, it should be used, since it creates certain efficiencies.

Time factor

The first is that of time. A named beneficiary is likely to get the money in his hand in the shortest possible time. Common vehicles that allow a beneficiary to be named are: life insurance, pensions, mutual funds and unit trusts.

A beneficiary designation also supersedes any allocation on a will.

In other words, an heir named in a will to get life insurance proceeds, who is different from the named beneficiary in the life insurance, has no right to the money in life insurance.

The insurance company will pay the money to the named beneficiary and disregard any claims by the person named in the will.

The second efficiency is that the life insurance proceeds are not subject to tax. In the case of Key Man insurance, there is an interpretation that needs to be noted.

Key Man insurance is normally bought by companies to cover the financial loss to the business of a key person in a business.

Should the Key Man die, the business may lose money, because of the loss of his expertise.

The insurance proceeds can then be used to satisfy debts, tide the business over while its doors are closed, or to satisfy the widow, for example, who may have a claim to income from the business.

Fill holes

But such proceeds from business insurance can be subject to tax, if the premiums paid for the policy were expensed by the company.

The better method to pay such premiums would be to increase the taxable income of the Key Man and use that increase to pay the premium, ie pay the premium in after-tax dollars.

This will avoid taxation on the proceeds when it becomes payable.

The critical learning with respect to naming a beneficiary is something called “insurable interest.”

The named beneficiary must have an interest in the continuing life of the insured, or of the business, that exceeds any benefit that can be gained from his death.

If a mother loses a child, money cannot compensate for that loss; her greater interest is in preserving the life of her child. She, therefore, has a proper insurable interest.