Good for you! You’ve taken a giant step in protecting your loved ones – applying for life insurance. Preparing and planning before anything happens to you is always better than leaving your loved ones to pick up the pieces. Now, you may think that assigning someone to get the life insurance money after you die is a no-brainer, but choosing beneficiaries can be a little trickier than that. We’re here to help you avoid any mistakes and make sure your loved ones aren’t left in a tangled, legal mess.
10 Beneficiary Mistakes to Avoid:
1) Choosing a Minor as a Beneficiary
Maybe you are a single parent with young children. Life insurance companies will not pay the policy proceeds directly to a minor. Instead of naming a minor child as a beneficiary, set up a trust that benefits the child and name the trust as the beneficiary of the policy. Or you can name a reliable adult who will act on behalf of the minor’s benefit.
2) Giving Money without Conditions
If you name your young-adult children as beneficiaries without putting any conditions in place, problems could arise. For example, say the policy owner dies unexpectedly and leaves his 18-year-old son with millions in death benefit money. This might be very overwhelming for the son and he probably wouldn’t know what to do with it all. Setting up a trust that states how much money and when it should be given would be wise.
3) Believing a Will Trumps the Policy
Don’t think that updating your will is good enough. If your will and policy name different beneficiaries, the life insurance money will go to whoever is listed on the policy. A life insurance policy is a contract and supersedes a will.
4) Not Reviewing Your Policy
Our lives are not stagnant. Marriage, divorce, deaths, new babies, all these major life events will bring the need to change your policy beneficiaries. Review your life insurance policy after life events, or every other year or so. An awful mistake to make would be to forget to remove your ex-spouse as beneficiary leaving your new spouse with nothing should you die. And unless you want your adult children to squabble after discovering who the favorite was, be sure not to just list the eldest, “set it and forget it”, and not update the policy as you have more children.
5) Making a Dependent Ineligible for Government Benefits
If you have a lifelong dependent, such as a child with special needs, it would be wise not to list them as a beneficiary. Anyone who receives a gift or inheritance of more than $2000 is disqualified for government benefits such as Supplement Security Income and Medicaid. Instead, set up a special needs trust and name the trust as the beneficiary.
6) Not Being Specific
Instead of simply saying you want “my children” to be the beneficiaries, list their names, Social Security numbers and addresses. Your beneficiaries will get the payout much quicker because the insurance company will not have to search for them. Also be sure to specify how you want the payout divided. Does each beneficiary get the same amount? Or do different beneficiaries get different percentages?
7) Overlooking Your Spouse in a Community-Property State
If you choose to name someone other than your spouse as a beneficiary, some states require your spouse to sign a form waiving rights to the money. The community-property states are: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
8) Falling Into a Tax-Trap
If your life insurance policy states three different people as the owner, the insured, and the beneficiary, then the death benefit could count as a taxable gift. For example, if a wife owns a life insurance policy on her husband and their adult daughter is the beneficiary, then technically the wife is gifting her daughter the policy proceeds should her husband die. The person who makes the gift (in this case, the wife) will be subject to a tax if it exceeds federal limits. This situation could be remedied if the husband owned his own policy, naming his daughter as the beneficiary. However, if they live in a community-property state the wife would need to sign a waiver (as discussed earlier).
9) Naming Only a Primary
People often make the mistake of only naming their spouse as a beneficiary, but what happens if the spouse dies before them? Or what if the insured and beneficiary die at the same time? If there is no living beneficiary, the life insurance proceeds will go into the estate and is subject to probate (this is a court-controlled process of wrapping up a deceased person’s affairs and proving the identities of individuals entitled to the deceased’s property.) This can be a very long process. Another complication to having no living beneficiaries would be creditors. Normally life insurance proceeds are protected from creditors, but if there are no living beneficiaries then the proceeds can be open to creditor’s claims.
10) Keeping Quiet
Lastly, but maybe the most important mistake to avoid, do not keep your life insurance policy a secret. Be sure to talk with your family and beneficiaries about the policy and where they can find it should you die. The insurance company is not going to automatically know when you die and immediately just send your loved ones money. The beneficiaries need to claim the benefit, but if they don’t know a policy exists, all of your planning to protect them will have been in vain.
If you have any questions, contact us for more information. We’re happy to help. You can also check out our Q&A page which is full of information you may have always been wondering! If you are just in the process of thinking about getting life insurance, our instant online term insurance quotes let you see prices anonymously. We do not ask for your contact information, so you do not have to worry about getting calls and e-mails from strangers.