“You are about to put pen to paper to designate who will one day reap the benefits of your generosity, but then you remember hearing stories about problems with the beneficiaries of life insurance policies.”
You have a life insurance policy to take care of your loved ones. You are about to put pen to paper to designate who will one day reap the benefits of your generosity, but then you remember hearing stories about problems with the beneficiaries of life insurance policies. To help you choose wisely, here are five mistakes people make when choosing life insurance beneficiaries.
Naming a Minor Child or Young Adult as the Beneficiary
A minor child cannot receive life insurance proceeds directly. You will have to name someone to get the proceeds. However, you may be leery of naming someone to get the money and having to trust that the person will do the honorable thing and hold the money for your child. If so, you can create a trust for the life insurance proceeds to protect your minor child’s inherited assets.
Giving a massive chunk of money to an 18-year old is usually setting this young person up for failure. Your elder law attorney can help you set up controls on how much money the person gets at different ages or stages. For example, with a $500,000 policy, your young adult child might get $100,000 when she graduates from college with her bachelor’s degree, $200,000 when she turns 25, and $200,000 when she turns 30.
If your beneficiary happens to have special needs, you might make him ineligible for government benefits if you name him as a beneficiary. Instead, you can set up a special needs trust to circumvent this problem.
Life Happens, So Update Your Beneficiaries
You should review your beneficiary selections at least once every three years. People forget to change their beneficiaries when major life events, such as death or divorce, happen. If any of your beneficiaries have died, you need to name new ones. When you divorce, you should update all your important legal documents, including your will or trust and your life insurance policies.
Doing Nothing, or Not Doing Enough
If you take out a life insurance policy but do not name someone as the beneficiary, the proceeds will go to your estate. Your heirs will have to go through a longer process before they get the money. They might not get the money at all, since assets that go through your estate are subject to claims of creditors. If the life insurance company pays the proceeds directly to a named beneficiary, the money is not part of your estate, so creditors of your estate cannot touch it.
Many people name a primary beneficiary but do not designate a secondary beneficiary. If your primary beneficiary dies before you do, the money will go into your estate. You should name a back-up (secondary beneficiary) and a second back-up (final beneficiary).
Be specific when writing down your choice of beneficiaries. Do not merely write, “my wife,” for example. If you divorce, then later remarry, which wife gets the money? The one who was your wife when you took out the policy or the one who was your wife when you passed on? Simply writing “my children” is also problematic. Write the full names of your beneficiaries and their addresses. The insurance company needs to be able to find your beneficiaries.
The laws are different in every state, so be sure to talk with an elder law attorney in your area. This posting discusses the general law.
Insure.com. “10 ways to screw up when picking life insurance beneficiaries.” (accessed December 6, 2017) https://www.insure.com/life-insurance/naming-life-insurance-beneficiaries.html