Part of your estate is a significant life insurance policy. You want to make sure that your heirs are taken care of, and this is one way to do it. You've been paying into the policy for years.
Perhaps the cheapest and easiest way to set things up is simply to name a beneficiary for the policy. When you pass away, the money goes directly to that person. Other options, such as using a trust, can be a bit more complex.
But does the ease of using a beneficiary designation mean that it's the path you should take? You also need to be aware of the potential drawbacks. Depending on your goals for that money, this may not be the right thing for you.
One person gains control
First and foremost, naming one person as the beneficiary means that they gain complete control over the money. Is that going to sit well with the rest of your heirs? Even if that person promises to distribute the money to the other heirs, can you trust them to do it?
Even writing it into your will does not help. The money goes to the beneficiary and becomes part of their estate. Regardless of what your will says, they can use the money as they see fit. This works in some families and not in others. You simply need to know what is best for your family.
Another thing to consider is that the beneficiary can then put the money to use in any way that they want, even if it is not for the good of the estate. Not only may this prevent other heirs from getting a share, but it can cause significant financial problems.
For instance, maybe you know that your estate has some outstanding debt that your heirs need to settle up or maybe you're thinking about the impact of taxes. You don't want to put them in a tough situation, so you established the life insurance policy to cover those costs. You communicated to your heirs that this is what they can use the money for, taking the strain off of them and the rest of the estate.
That's a fine plan, but the lone beneficiary can use that money and buy a house or go on vacation or do anything else they desire. They don't have to pay off taxes or debt. They can let that burden fall on the estate and the rest of the heirs, who now have to figure out a solution on their own.
Again, it's all about knowing what estate planning options are best for you. Make sure you carefully consider how you can avoid disputes and legal or financial problems.