Leaving life insurance to your estate

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Q. Why would anyone name his or her estate as a beneficiary of a life insurance policy? To me that doesn’t make much sense because that money can be taken by creditors of the estate. Naming an actual beneficiary makes more sense because then the creditors cannot go after that money. The only way that would make sense to me is if there was absolutely no debt incurred by the deceased and that is highly unlikely.
— Amateur estate planner

A. You’re correct that naming your estate as the beneficiary of an asset would put that asset at risk with creditors.

That would include life insurance policies or any other contract such as an annuity.

Naming the estate as beneficiary would subject the entire amount to be included in the probate estate, which would probably increase costs, said Jodi D’Agostini, a certified financial planner with AXA Advisors/The Falcon Financial Group in Morristown.

“It will be included in the decedent’s gross estate and are subject to the estate’s creditors — people and institutions that might be owed money,” D’Agostini said. “When there is a named individual as the beneficiary, they are generally not obliged to pay off any debts with the proceeds.”

For estate tax purposes, the estate is called the “gross estate,” she said. This includes many items that are not included in the probate estate.

When assets go through the probate process, D’Agostini said, it will create a delay in the proceeds going to the beneficiaries and will increase administrative costs.

She said life insurance is often purchased for income protection as it can make you whole after the death of a loved one.

“It is often difficult to pay the bills without a ready source of income,” she said.

The proceeds would also be subject to state inheritance taxes, she said.

“The only possible reason to name a small amount to the estate would be to provide liquidity to pay debts that the estate must pay,” D’Agostini said.

Generally, it’s advisable to name an individual as beneficiary, she said.

“The beneficiary would be paid without delay, and the beneficiary doesn’t incur any additional expenses,” she said. “One more piece of advice — add a contingent beneficiary just in case the named beneficiary dies before you do.”

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NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.