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In the language of life insurance, a beneficiary is the recipient of the proceeds of a policy when the named insured dies. The owner of a life insurance policy has a great deal of flexibility in naming beneficiaries and can generally name anyone he or she chooses. When making beneficiary decisions, it is important to ensure that the wishes of the policyowner are fulfilled and that legal complications are avoided.



Types of Beneficiaries

Beneficiaries are typically categorized as either primary or contingent. A primary beneficiary is entitled to the proceeds of the policy upon the death of the insured, but such rights expire if he or she dies before the insured. A contingent (or secondary) beneficiary is entitled to the policy proceeds if the primary beneficiary has predeceased the insured. One fairly common arrangement might stipulate that, if a primary beneficiary dies before collecting the entire proceeds of the policy, then the remaining amount will be payable to the contingent beneficiary. It is often desirable to have several levels of contingent beneficiaries.

A beneficiary can be either specific (a person identified by name and relationship) or a class designation (a group of individuals such as the "children of the insured"). While the naming of specific beneficiaries is usually clear-cut, unintended complications can arise when designating classes of beneficiaries.

For example, if you plan to name your children as beneficiaries, you will need to clarify if you intend to include adopted children or children by a former spouse. If your children are minors, it is also important to determine if the insurance company will in fact pay the proceeds to a minor beneficiary. Generally, insurers insist on paying proceeds to a legal guardian rather than to a minor.

Consider the following hypothetical situation in which the policyowner’s intentions appear straightforward, but could become complicated. Harriet, who is seventy years old, has planned for the proceeds of her life insurance policy to be paid to her children (Sam, Carole, and Jill) or her grandchildren. Now, suppose Sam and Carole die before their mother. Sam leaves four children and Carole has no children. How will the proceeds of the policy be distributed when Harriet eventually dies?

Per stirpes and per capita are terms that describe methods of distributing property to family members and heirs. Per stirpes means "branches of the family," and per capita means "by heads." In the example above, under a per stirpes distribution, Jill (one branch) would receive one-half of the proceeds, and Sam’s surviving children (the other branch) would divide the remaining half among themselves. Under a per capita distribution, Sam’s four children, along with Jill, would each receive one-fifth of the proceeds. Remember, there might be complications if any of Sam’s children are still minors when Harriet dies and legal guardians have not been appointed.

There are also different consequences according to whether beneficiary designations are revocable or irrevocable.

If a beneficiary designation is revocable, the policyowner reserves the right to change the beneficiary. A person designated as a revocable beneficiary has only an "expectation" of benefits, since the owner of the policy can exercise any of the policy rights without the consent of the revocable beneficiary.

On the other hand, an irrevocable beneficiary designation cannot be changed without the consent of that beneficiary. While this arrangement is sometimes desirable for estate planning purposes, the legal status of an irrevocable beneficiary is uncertain. Some may regard an irrevocable beneficiary as a "co-owner" of the policy; therefore, the beneficiary’s consent is needed to exercise any policy rights. At the other extreme, others may contend that an irrevocable beneficiary’s consent is needed only for exercising a change of beneficiary.

The latter position can create the somewhat puzzling effect of having the beneficiary’s rights compromised if the policyowner exercises other rights, such as surrendering the policy or permitting it to lapse. Due to the vague legal status of an irrevocable designation, it is usually preferable to use revocable beneficiary designations.

A further complication can arise when one’s estate is named as a beneficiary of a life insurance policy. The policy proceeds may be tied up in the probate process or reduced by the claims of creditors.

The distribution desired by a policyowner must be clearly set forth in the beneficiary designation. A change in family circumstances after a policy is initially written, such as a divorce, could leave you with unintended beneficiaries, so it is important to review your insurance policies whenever such changes occur. If you are unsure about your beneficiary designations, check your policies, and take the steps necessary to make any appropriate changes. Your family will be sure to appreciate your thoughtfulness.$

If you are approaching retirement age, or are just beginning to plan for it, you might be interested to learn that retirement may require 70%–90% of your current annual income in order for you to maintain the quality of life you presently enjoy (American Savings Education Council (ASEC), 2003). Setting goals—such as where you might like to live and the activities you plan to pursue—is an important factor in any savings plan. How do you determine the total amount needed for retirement and calculate the amount of savings you’ll need to accrue each year? The worksheet on page 3 will help you answer these questions, based on calculations developed by the ASEC.

As an example to help you along the way, consider the hypothetical case of Henry Foster: At age 50, Henry earns $50,000 per year. He estimates that during retirement he’ll need 70% of his income ($35,000 per year) to maintain his current standard of living. While he does not have a traditional employer pension, he does expect to earn $5,000 annually as a part-time writer. In addition, he estimates he’ll receive approximately $14,500 annually from Social Security.

1. Required Income. How much money will you require per year in order to live the lifestyle to which you have grown accustomed? Enter 70% of your current annual income as a basic minimum.
   
2. Social Security. Project the amount you expect to receive from Social Security. Obtaining a Social Security statement from the Social Security Administration (SSA) will enable you to enter a more accurate estimate. You can obtain a statement by calling 800-772-1213
   or on the web, at www.ssa.gov. For a rough estimate, enter $8,000 if you earn less than $25,000; $12,000 if you earn between $25,000–$40,000; or $14,500 if you earn $40,000 or more. If you are married and earn less than your spouse, enter the greater of either your own benefit or 50% of your spouse’s benefit.
   
3. Traditional Employer Pension. Enter the amount you expect to receive in today’s dollars.
   
4. Earned Income. Enter your estimated annual part-time income.
   
5. Retirement Shortfall. Subtract lines 2, 3, and 4 from line 1. This is an estimate of the amount of money you’ll need from savings each year, in addition to the above sources of income.
   

Now that you’ve determined the amount you’ll need in retirement, as well as your shortfall, it’s time to figure out how much you’ll need to save. Assuming a 3% constant real rate of return after inflation, a life expectancy of age 87, and Social Security benefits beginning at age 65, performing the following calculations can help you estimate the total amount you’ll need on your retirement day. These calculations do not represent the performance of any particular savings vehicle and are for illustrative purposes only. Bear in mind that the full retirement age (the age at which one is eligible to receive full Social Security benefits) is gradually increasing to age 67 for individuals born in 1960 and later.

For comparison purposes, let’s return to Henry Foster, who plans on retiring in 15 years at age 65 and has managed to save $45,000. Based on his income requirements and his income resources, Henry will need to save a total of $254,200 by retirement, or $9,474.40 per year.

6. To estimate how much you need to save, multiply line 5 (the amount of your retirement shortfall) by the appropriate factor below:

7. Enter the current total of your savings including any funds in retirement plans such as a 401(k) or Individual Retirement Account (IRA).

8. Multiply line 7 by the appropriate factor:

9. Subtract line 8 from line 6 to reach the estimated amount of savings needed at retirement.

10. To estimate the amount you need to save each year multiply line 9 by the appropriate figure below:

This worksheet is intended to be used as a starting point estimate of what you will need to save for a financially secure retirement. For specific guidance, consult a financial professional. Learning what you must save in order to reach your retirement goals is an important aspect of retirement planning, and the sooner you do so, the closer you will be to fulfilling your dreams. $

These days, it is not unusual for many people to live 20 or more years beyond the normal retirement age. Unfortunately, as many seniors reach their eighties and nineties, plans that were satisfactory at age 65 may require a second look.

One area of special concern to many older seniors (as well as their adult-age children) is whether or not they will be able to continue to manage their assets. If they feel they can no longer handle these duties, they may wish to transfer this responsibility to others.

A variety of arrangements are available to achieve this objective. Here are a few you may want to consider:

Revocable and Irrevocable Trusts. Seniors who want to retain control over their property, while delegating responsibility for daily management to others, may want to consider a revocable trust. This arrangement allows seniors to monitor the management of their assets, yet offers the flexibility of changing the trust as experience and circumstances warrant. As added protection, a revocable trust can be left unfunded, as long as a senior is legally competent. As an alternative, seniors who are willing to relinquish ownership of assets altogether could establish an irrevocable trust.

Durable Power of Attorney. This mechanism allows seniors to appoint a trusted relative or friend as a representative in legal and financial decision making. The powers granted may be broad or limited in scope and may vary from state to state. They remain in effect during disability or incompetence; although, in the event of incompetence, a guardian or conservator could revoke them. Some financial institutions are reluctant to recognize durable powers of attorney, so it is worthwhile to explore this possibility beforehand.

Private Annuities. Seniors can choose to transfer property to a family member in exchange for the recipient’s promise to make periodic payments for the rest of the senior’s life.

Informal Arrangements. Seniors can transfer property informally to their heirs—in many cases free of gift taxes—in exchange for being taken care of for the rest of their lives. This arrangement, however, should be approached with caution. Even well-intentioned adult children may deplete assets through poor management, divorce, or creditor claims. Once the assets are gone, the senior could become dependent on the goodwill and financial circumstances of relatives.

As seniors age, a periodic review of their financial arrangements should be made. In making the transition to later life-stages, new needs and concerns may justify plan revisions. Seniors and their families should consult with their financial professionals and attorneys to help determine the best-suited strategies for their needs. $