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4 tips for naming life insurance beneficiaries

If you have a life insurance policy, it's probably one of the more valuable assets you own. It must be considered when making an estate plan. You may not even have reached retirement age yet - maybe you're just 50 years old, still expecting to survive for decades - but you want to make sure everything is in place. Consider these four tips when you pick a beneficiary.

1. Don't name a child if he or she is a minor.

The first person most parents think of when deciding who to name is either a spouse or a child. Leaving the money to a child may seem like a better plan in case you and your spouse die at close to the same time. That's fine if your child is an adult, but it can get complicated if the child is a minor, as the insurance company won't pay someone under 18. This means a guardian has to be found, the money has to go to the guardian to keep for the child, and the whole thing plays out in court.

2. Create a trust.

One way around the above issue is to create a trust. The policy can then pay the trust directly, and the trust dictates how the money is passed on. It can simple: just paying the child when he or she reaches the age of 18.

However, a trust also gives you more power to allocate the money how you want to - such as giving the child the money specifically for college or paying it out at certain ages so that a young adult does not waste the payment. Some parents will stipulate that money can only be used for college until the child is 30 years old, for example, when it pays out in full and could be used for a wedding, a home, a business, or something of that nature.

3. Understand that the policy trumps your will.

For example, if the policy says it will pay out to your spouse, and then you write in your will that the money should go to your child, it's still going to your spouse. That contract won't be broken. To make changes, update the policy itself, not just your will.

4. Be specific, especially if it's complex.

Not being specific can lead to vague directions and arguments between family members. For instance, maybe you have two kids and you want the money split equally between their families. Do you mean you want 50 percent to go to each child? Or do you mean that each family member - including your grandchildren - should get an equal amount? What if one child has his or her own children, but the other doesn't? Would that "side" of the family then get more, or would it split 50/50 between your kids and then be divided on one side among the grandkids?

You can see how even just addressing a life insurance payout can quickly get complicated. The key is to consider all possible outcomes in advance and have a solid plan in place to distribute the money properly. Even if you're not expecting the policy to pay out for decades, you're best off to do this in advance.

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