How should I set up my life insurance policy beneficiaries? We answer this question in today’s Quotacy Q&A Friday by explaining what not to do when choosing life insurance beneficiaries.
Welcome to Quotacy’s Q&A Friday where we answer your life insurance questions. Quotacy is an online life insurance agency where you can get life insurance on your terms.
I’m Jeanna and I’m Natasha.
We’re mixing it up a bit today. Setting up your policy’s beneficiary is an important step in buying life insurance. And making sure they are set up properly is something Quotacy agents often help clients with.
So instead of answering a direct question today we’re going to focus on a topic we get many different questions about and that topic is beneficiary designation best practices or
Nine things not to do when choosing your life insurance policy beneficiaries.
Number one: don’t name a minor child as your policy’s beneficiary.
Life insurance companies will not write a check worth thousands or millions of dollars to a minor child. If you name your child beneficiary to your policy and they are not yet legal adults when you die the court will appoint a property guardian to manage these funds until your child reaches legal age.
To avoid this situation, instead name a trusted adult to be the beneficiary. Someone who will use the life insurance proceeds for your child’s benefit.
Or create a living trust and name your children the beneficiaries of the trust and then name the trust the beneficiary of your life insurance policy. A trustee you appoint will then manage the funds if your children are minors. With a trust you can also specifically state how much money will be transferred to your beneficiaries and when.
Or you can designate your minor children as beneficiaries of your policy under the Uniform Transfers to Minor Act. Under UTMA a custodian manages the proceeds for the child but when the child legally becomes an adult the custodian must transfer the proceeds over.
A trust may be a better option if you worry about your 18-year-old having hundreds of thousands of dollars transferred to them in one fell swoop.
Number two: don’t update your will beneficiaries without updating your life insurance policy beneficiaries.
Not many people realize this but a life insurance policy trumps a will. If your will states “I want my life insurance death benefit to go to my sister” but your life insurance policy beneficiary lists your brother, your sister’s going to be left out. If your will and life insurance policy name different beneficiaries, the life insurance money will go to whoever stated on the policy.
Number three: don’t accidentally disqualify a beneficiary from government benefits.
This mistake can happen if you have dependents relying on government benefits such as Supplement Security Income or Medicaid. For example, if your adult daughter has special needs we don’t recommend naming her as your life insurance policy’s beneficiary.
Having any assets worth more than $2,000 would disqualify your special needs daughter from many federal and state assistance programs. Set up a special needs trust instead. Because the trustee has control over the funds in a special needs trust, and not your child, your child can still qualify for government assistance.
Number four: don’t be vague.
So, Jeanna, let’s say you want to name your five siblings as your life insurance policy’s beneficiaries. Don’t just write in “my siblings” on your paperwork. They’ll receive the death benefit checks much faster if you list their full names and contact information.
Also, if you want different siblings to get different amounts of money be sure to list the percentages. For example, maybe you would prefer your three siblings with children to get a little bit more money than the siblings that don’t have children.
Tell your beneficiaries that they are beneficiaries of your life insurance policy. If you die and your loved ones had no idea you had life insurance then it was all a waste.
Number five: don’t overlook your spouse in a community-property state.
If you choose to name someone other than your spouse as a beneficiary, community-property states require your spouse to sign a form waiving rights to the money.
Generally, as a policyowner, you have a lot of flexibility on who you can name as a beneficiary of your policy; however, if you live in a community-property state and income earned during the marriage is used to pay the premiums, then typically your spouse legally has rights to 50% of the death benefit even if you name someone else as the primary beneficiary.
Number six: don’t fall 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 the adult daughter is the beneficiary then according to the law, the wife is gifting her daughter the policy proceeds when her husband dies.
The person who makes the gift, in this case the wife, will be subject to a tax if it exceeds federal limits. In the insurance industry, this is known as the unholy trinity or the Goodman triangle.
But worry not. This situation is easily remedied. The husband could instead simply own the policy on himself and name the daughter the beneficiary.
Number seven: don’t forget to name a contingent beneficiary.
People often make the mistake of only naming their spouse as the beneficiary. But what happens if your spouse dies before you? Or what if you die at the same time? If no living beneficiary exists, the life insurance proceeds will go into the estate and is subject to probate where the courts decide who gets what. Probate 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. So be sure to name a contingent, or back-up, beneficiary to receive the death benefit if the primary predeceases you or is otherwise unable to accept the money.
Number eight: don’t forget to occasionally review your policy beneficiaries and update as needed.
You will not believe how often this scenario occurs:
Boy meets girl.
Boy marries girl.
Boy buys life insurance and names the girl the beneficiary.
Boy and girl divorce.
Boy marries a new girl.
Boy dies, but never updates his life insurance policy.
Guess who gets the life insurance death benefit? The ex-spouse.
We recommend that you review your policy after every big event, such as marriage, divorce, new births, home purchases, grandchildren, etc.
And finally number nine: don’t keep your life-insurance policy a secret.
Tell your beneficiaries that they are beneficiaries of your life insurance policy. If you die and your loved ones had no idea you had life insurance then it was all a waste. Life insurance companies have millions of clients. They don’t know when one of them dies unless they’re sent a death claim. Be sure to talk with your family and beneficiaries about the policy and where they can find it in the event of your death.
Thanks for watching. If you have any questions about life insurance, make sure to leave us a comment. And if you have any questions regarding today’s topic, you can learn more in this blog: Choosing Life Insurance Policy Beneficiaries. Otherwise, tune in next week can we talk about term life insurance basics. Bye!
About the writer
Writer, Editor, and Co-host of Quotacy's Q&A Fridays
Natasha is the content manager and editor for Quotacy. She has been in the life insurance industry since 2010 and has been making life insurance easier to understand with her writing since 2014. When not at work, she's probably studying and working toward her Chartered Life Underwriter (CLU) designation while throwing a tennis ball for her pitbull mix, Emmett, or curled up on her couch watching Netflix. If it’s football season, the Packers game will be on. Connect with her on LinkedIn.