Investing in life insurance is a crucial step in estate planning and a way to show love to your family after you are gone. However, naming the wrong beneficiaries on your policy can lead to unintended consequences for the ones you want to protect. To prevent these mistakes, here are the four most common errors we see clients make when selecting beneficiaries and how to avoid them.
It may seem obvious, but many people forget to name a beneficiary on their life insurance policies or mistakenly name their estate as the beneficiary. This can cause the insurance proceeds to go through probate, a court process that determines who gets your death benefits. This process can take months or even years and leaves the benefits open to creditors, potentially depleting the funds. To avoid this, make sure to name at least one primary adult beneficiary and a contingent (alternate) beneficiary in case your primary choice dies before you. To ensure maximum protection, consider naming the Trustee of a well-thought-out Trust Agreement as the primary beneficiary.
Not naming a beneficiary is a major mistake, but failing to update your beneficiaries is even worse. This is particularly important if you are in a second marriage and forget to remove an ex-spouse as the beneficiary, which can leave your current spouse with nothing. Review and update your beneficiary designations annually as part of your estate plan review and immediately after events such as divorce, deaths, and births. As our client, you will have built-in systems to keep all your estate plan documents and decisions, including beneficiaries, regularly updated.
You may be able to name a minor child as a beneficiary, but it’s not a good idea. Minors cannot receive insurance benefits until they reach the age of maturity, which can be as old as 21 in some states. If a minor is listed as the beneficiary, the insurance proceeds will go to a court-appointed custodian who will manage the funds for a fee until the child reaches maturity. Even if the minor has a living parent, the court could appoint a paid fiduciary to control the funds instead. To avoid this, set up a trust to receive the insurance proceeds and name a trustee to hold and distribute the funds to the minor, or protect them from divorce and creditors.
While a loved one with special needs may seem like an obvious choice, naming them as the beneficiary can have negative consequences. Doing so can disqualify them from receiving government benefits. Instead, create a “special needs trust” to receive the insurance proceeds and have the money managed by the trustee you name without affecting benefit eligibility. Special needs planning involves more than just life insurance and requires a thorough understanding of the rules, which vary greatly by state. If you have a child with special needs, meet with us to discuss your options and provide a lifetime of care and protection.
Naming life insurance beneficiaries may seem simple, but it’s important to be careful to prevent major problems for your loved ones. By avoiding these four common mistakes, you can ensure that your insurance policy provides the maximum benefit and protection for the ones you care about.
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