I recently posted about the importance of regularly reviewing and updating beneficiary designations for all of your financial accounts, retirement accounts, pensions and life insurance policies.  The recent United States Supreme Court case, Kennedy v. Plan Administrator for DuPont Savings and Investment Plan, 497 F.3d 426 (2009),  highlights how critical it is to keep your beneficiary designations up to date.

William Kennedy participated in his employer’s pension plan.  In 1971 William married Liv and in 1974, William updated his beneficiary designation to name Liv as beneficiary of his pension.  William did not name a contingent beneficiary.  In 1994 the couple divorced.  Under the terms of the divorce decree, Liv waived all rights to the pension.  After the divorce, William updated beneficiary designations on other assets to name his daughter as beneficiary, but he neglected to update the beneficiary designation on his pension.

Upon his death, Williams daughter, Kari was appointed as executor of his estate.  Kari requested that the administrator of the pension deliver the funds to her, but the pension administrator refused and instead issued the funds to Liv in accordance with the beneficiary designation.  The Supreme Court upheld the pension adminsitrator’s actions despite the waiver of rights contained in the divorce decree.  The Court did indicate that a Qualified Domestic Relations Order (QDRO) would have been effective in eliminating the spouse’s rights.  Nonetheless, this decision indicates the weight of importance placed on beneficiary designations and highlights the need to keep designations up to date as part of your comprehensive estate plan.

The following story comes from one of my colleagues:

After weathering a difficult divorce, Bob met Mary, the love of his life.  After a year of courtship, Bob and Mary were married.  The couple built a great life together.  Bob was in upper management at a major local company, and Mary was a homemaker who relied on her husband for support.  In their free time, the couple traveled the world together and lived life to the fullest.  Sadly, Bob unexpectedly died of a heart attack.

After the funeral, Mary sought the assistance of an attorney to help with the administration of Bob’s estate.  The attorney sorted through all of Bob’s files and records and discovered that 15 years prior, Bob had taken out a $1 million life insurance policy.  Unfortunately, after his marriage to Mary, Bob had never updated the beneficiary designation and it still named his ex-wife as the recipient of the $1 million life insurance proceeds.

Mary was devastated. She and Bob had been married for over ten years. To make matters worse, Bob’s will was drafted such that all estate taxes were to be paid out of the residuary estate. Mary was the recipient of the residuary estate.  As a result, not only did Mary not receive the proceeds of the life insurance policy, but she had to pay estate taxes on the $1 million life insurance proceeds that were paid to the ex-wife!

It is important to recognize that a will does not dictate how all of your assets will pass upon your death.  Many assets, such as certain bank accounts, IRAs, 401(k)s, retirement accounts, life insurance polcies, etc., use beneficiary designations to indicate who will receive the asset upon your death.  As part of a comprehensive estate plan, it is critical that all of your beneficiary designations are reviewed with your estate planning attorney to ensure that they will operate properly in conjunction with your estate planning documents to achieve your intended result.  In addition, it is crucial that your beneficiary designations be reviewed and updated on a regular basis, preferably at least once per year.

Last night I had the pleasure of attending the annual Triangle Women of Distinction Celebration organized by the Raleigh Chapter of Soroptimist International.  Soroptimist is a wonderful philanthropic group aimed at improving the lives of women and girls.  From running local projects such as a professional clothing programs similar to “Dress for Success” and public forums on human trafficking and its impact both locally and globally, to being one of the few non-governmental organizations that consults with and sends delegates to United Nations meetings, the members of Soroptimist are committed to making a difference in the world.

The keynote speaker for the evening was award winning author and speaker, Sharon Hill.  Sharon gave an excellent presentation entitled “Nothing to Lose – Everything to Gain” that shared her life story of climbing the ladder of success.  Her presentation was lively and engaging.  Early into the presentation one story jumped out to me as being relevant to this blog and the current economy; the following is my paraphrase of Sharon’s story:

I was born in “da hood” of Chicago.  My mother was a native to Chicago, my father a country boy from Alabama that constantly fell victim to the “last hired, first fired” precept.  I am the oldest of three daughters.  While we had the bare necessities of life, we were, by most peoples standards, poor.  But my parents were determined and hardworking and eventually my father built us a home in the suburbs.  Without even a high school diploma, he drafted the house plans, hand dug the foundation and did the majority of the woodwork and carpentry himself.  Nonetheless, times were always tight in our household and when I was only thirteen, my father passed away unexpectedly.  It was not until after his death that my mother learned that only one month prior my father had canceled his life insurance to save a few extra dollars every month.

While this is the sort of thing that attorneys regularly caution against, I think there may be a public tendency  to envision attorneys, especially estate planning attorneys, as modern day Chicken Little’s running around declaring that tragedy could strike at any time.  But Sharon’s story is a first-hand account that death can happen unexpectedly.  While it may be tempting to consider trimming insurance-related expenses in these uncertain economic times, please resist the temptation.  Your family’s security is worth more than a few dollars per month.

For about two years, I have been a member of a wonderful women’s investment club.  The club consists of 20 women of varying occupations.  We get together once per month to eat some good food, drink some wine, learn about investing and have fun.  After our most recent meeting, one my friends approached me.  She and her fiance, who has a young son, have begun the process of discussing their estate planning and also life insurance planning.   She had several questions about life insurance which got me thinking that I should do a post on life insurance.

Life insurance is a great financial tool to protect your family and provide them with financial support if you should die.  I am not a life insurance agent, nor am I an expert on life insurance, per se.  Instead, I’ve done a little research around the web and have rounded up some life insurance information from various websites.  In my search, I ignored the websites of life insurance companies and sought out independent sources.

Life Insurance Basics

CNN has a great primer on life insurance basics in their Money 101 series, covering:

• Top Things to Know
• Types of Policies
• Buying Strategies
• How Much Coverage Do You Need?
• How Long a Term?
• A Question of Health
• Web Shopping

Similarly, MSN Money includes some useful articles on learning the basics of life insurance including:

• Your 5-Minute Guide to Life Insurance
• How to Assess Your Life Insurance Needs
• The Lowdown on Life Insurance Medical Exams
• 5 Life Insurance Blunders to Avoid

Perhaps the most useful tool on the MSN Money site is the Life Insurance Needs Estimator. The estimator walks you through the process, step-by-step, of calculating the appropriate amount of life insurance coverage for you and your family’s needs.

Several sources discussed the differences and pros and cons of term life insurance and permanent life insurance:

• The Raging Debate Over Term vs. Permanent Life Insurance
• The Truth About Life Insurance
• Interesting Insights Into Life Insurance From an Actuary – How He Would Buy Life Insurance

Check Company Ratings

Finally, once you have found a life insurance policy that suits your needs, make sure to check the ratings of the insurance company.  Insure.com has a free online insurance company ratings tool that enables you to look up the Standard & Poor’s financial strength rating of over 3,000 insurance companies.