Life insurance is not interesting to most people, I know.

I’m a licensed insurance agent, but it’s not something I talk about with family and friends. But, I wish I had spoken to my family to offer some unsolicited advice before my uncle died many years ago.

I was surprised to learn he had made me the executor of his estate. I was even more surprised when I found all the necessary paperwork and learned he had listed “my estate” as the beneficiary of his life insurance.

There may be no worse way to handle the proceeds of a life insurance policy than to designate the estate as the beneficiary. Doing so completely negates the advantages of having life insurance, which can be so important to the surviving family members’ financial well-being.

A life insurance policy creates an instant estate and outlines a transfer of wealth. If set up correctly, it should pay beneficiaries immediately and tax-free outside of probate, and proceeds are not available to the deceased’s creditors.

However, if the policy is included a part of the deceased’s estate (the mistake my uncle made), loved ones will not have immediate access to the benefit to pay final expenses. The probate process (which averages nine to 12 months) delays payment, and the benefit will likely be subject to estate and inheritance taxes.

Also, the benefit may go to the decedent’s creditors rather than to heirs.

You can avoid all of this by properly naming your beneficiaries. Unfortunately, too many people designate them without a great deal of thought and with nodvice.

Types of beneficiaries

There are two types of beneficiaries. A primary beneficiary is the person (or organization) receiving the proceeds if he or she survives the insured person. A contingent beneficiary receives the proceeds only if the primary beneficiary dies before the insured person. A common mistake is thinking a contingent beneficiary is an additional or a co-beneficiary.

You may name multiple primary and multiple contingent beneficiaries. Simply specify the percentage you want each person to receive, making sure each group of beneficiaries adds up to 100 percent.

It’s important to note that having no beneficiary may be better than naming your estate as the beneficiary. With no beneficiary, proceeds are paid according to the policy. Usually, a policy’s order of payout is: spouse, children, parents and then siblings.

In general, but with some exceptions, there is no legal requirement to notify persons whom you name as a beneficiary. Nor are you bound to inform them of changes to their beneficiary status.

Quite a few states have laws that will automatically revoke beneficiary designations upon divorce. Thus, if you have remarried and intend to keep your previous spouse as the beneficiary, be sure to list them as “ex-wife” or “ex-husband” so your intentions are clear.

Transfer of Property at Death

Speaking beyond just life insurance, property is transferred at death in three primary ways: by contract designations, by operation of law, and under the terms of a validly drawn will:

• Transfers at death by contract. This means the product has a named beneficiary and its proceeds pass outside the deceased’s will. Language in the will has no effect on distribution of the proceeds. Examples of products with transfers at death by contract include life insurance, annuities, 401(k)s, IRAs, pension plans, pre- and postnuptial agreements and payable-on-death (POD) bank accounts. With the exception of trust agreements, my recommendation would be always to list a primary and a contingent beneficiary for any product that will transfer by contract. You may also want to contact your financial institution and name a beneficiary for a POD bank account to keep those assets out of probate.
• Transfers at death by operation of law. Ownership of some assets is governed by law and can vary by state. Scenarios include joint tenants with right of survivorship and joint tenants in common (these two are similar but have important differences upon the death of an owner) and intestate death (death without a will). For the latter case, in some states, assets pass to the surviving spouse.
• Transfers at death by will. All property not transferred by contract or operation of law is transferred through probate. The will becomes the complete estate plan for all probate property. It can assure the orderly distribution of your estate and your executor can exercise broad powers and discretion.

I recommend you obtain sound legal advice for your will preparation.

AUSA can help you in a couple of ways. If you already have AUSA life insurance, you can request a change of beneficiary form by calling AUSA Insurance at 1 (800) 882-5707.

AUSA recently improved its life insurance offerings. You can learn more and apply at www.ausainsurance.org.

Wills, codicils (a legal instrument modifying a will), trusts and elder law issues are the top legal services often used by group legal service participants.

AUSA has partnered with LegalShield to offer legal services to members at excellent group pricing ($15.95 in most states).

You can learn more and enroll at www.ausa.org/legal.