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Don’t take this risk with insurance

Insurance is a risk cover – don’t risk the nomination part.  Most people name their beneficiaries when they buy the policy, and then never give the subject another thought. That could be a mistake. Good consultants recommend that you take the time to review your policies’ beneficiary designations periodically (annually or whenever there is a birth, death, graduation, divorce, etc.) and make sure they reflect your current needs, goals and circumstances.

Here are some things to consider: In India in most forms, you can name the nominee and mention the designation.

Indicating individuals by name ”Padmini, my wife, whose date of birth is 12 July 1977 and the address is Plot 12, street 14, Guntur, and my children Ram, and Suresh”.

The advantages of such phraseology are that it is simple, clear, and leaves no room for misunderstanding about whom you wish to nominate and give the monies to. However, like all simple things, it has some problems. One, it is rigid. If you identify your current children by name, and then have a third child later, that child will not share in the policy. Unless you revise your beneficiary designations, this youngest child will not share in the life insurance proceeds. Also, if a named beneficiary dies before you, the beneficiary’s heirs may be cut off from receiving proceeds. Take a case where all your three children are married, and have children. In case one of your children should pass before you, the spouse and kids of that child of yours will receive nothing. So if you have a married child, ensure that the beneficiary designation is now changed to reflect his spouse, kids by name and designation. “Mr Suresh, my son, his spouse Mrs Lalitha Suresh and their daughter Ms Anuradha.”

This has more clarity than saying only “Mr Suresh” Naming beneficiaries by the class or group.  While making a will, you can use better language that will ensure omitting unintended beneficiaries by name. If beneficiaries are designated to be “all children of the insured,” future children will automatically be included. This can also be arranged so that proceeds are distributed as either per capita (based on a portion for each individual) or as a percentage per person. Provided beneficiary designations are clearly identified, this maybe the simplest, most effective method for naming beneficiaries.

However, there can be disadvantages. Things can become complicated if you have a complicated marriage. If you and your spouse have more than one marriage and children form both the marriages, you might have to be far more careful while naming the beneficiaries.

If you are not careful, the surviving spouse of your first wife may get all the money intended for the children from your first marriage, and that is not a comfortable thought! And for heavens sake do not think this happens only in TV serials. Real life stories are stranger than fiction. Current tax position is easy on the estate Currently, at least in India, there is no estate duty. So there is no share to be paid to the government of India, at least after your death. However, when you nominate some person you may have to remember that say a 30% tax could potentially reduce the amount of cash that will be available to the nominee.

Naming an irrevocable trust as beneficiary. In case you wish to leave some money to a charity, you will still have to name a beneficiary with a clear instruction that the executor of the will should pay the money to a trust. I have not seen Indian insurance companies accepting a trust as a nominee, but my experience is limited, and if any reader has different experience, I will be delighted to hear about it. I see no practical reason why I cannot leave a portion of my money to a charitable or a religious organisation.

Advantages: Your children do not feel deprived – the money is not coming to them and then, going to charity. It is going direct, so there is lesser heartburn.

Disadvantages: Once the trust is established, you surrender all control over the trust and the policy, including the right to change the beneficiary. Since the trust is irrevocable, it cannot be altered once set up. Final word on naming beneficiaries: Be aware that the decisions you make can have consequences that affect several generations for years to come.

So, when it comes to naming your life insurance beneficiaries:

1. Be as clear and specific as possible to avoid ambiguity and potential conflicts.

2. Review (and, if necessary, revise) your choices regularly, especially at times in your life when circumstances change — such as marriage, childbirth, divorce, career change, economic change, etc.

3. Talk to your consultant to discuss the fine-point consequences of your decisions. The laws vary from country to country, so get specific recommendations from your legal and tax advisor before you act.