It may sound deceptively simple, but naming a beneficiary to receive the proceeds of your life insurance can be a complex and difficult task. Mistakes that you make when choosing a beneficiary can end up causing costly and damaging problems for the loved ones you leave behind.
To help you through this delicate task and avoid devastating errors, we’ve listed the eight most common mistakes that people make when naming a life insurance beneficiary.
Naming only one beneficiary. If you only name a primary beneficiary, this can create major problems if the person you named does not survive you. When there is no living beneficiary, the life insurance proceeds will go to your estate and be subject to probate and the claims of creditors.
That’s why it’s important to name a secondary and tertiary beneficiary in addition to your first choice. With this safeguard in place, the secondary or tertiary beneficiary will receive the money from your life insurance payout if something should happen to the preceding beneficiary.
Naming a minor child. As a parent, you are probably eager to make sure your child is provided for if the worst should happen. But naming your child as the beneficiary on your life insurance is highly inadvisable, since insurers will not pay life insurance proceeds directly to someone who is under the age of 18.
If you are seeking to provide for your child in the event of your death, a better option is to create a trust for the child and name the trust as the beneficiary of your life insurance. You may also consider naming a trusted adult as the beneficiary, who would be able to manage the money on their behalf.
Naming an individual with special needs. While it may seem like a good idea to leave life insurance benefits to someone with special needs, this can actually end up causing more harm than good. If he or she receives your life insurance proceeds, that person may be disqualified from receiving Social Security, Medicaid, or other government benefits.
If you are seeking to provide for someone with special needs, a better idea may be to set up a special needs trust and name the trust as the beneficiary of your life insurance policy. That way, proceeds of the policy can be used to supplement that individual’s government assistance benefits rather than removing them.
Naming an inappropriate beneficiary. Leaving a large sum of money to a very young adult or person with a substance abuse or gambling problem can be a big mistake. It’s often a better idea to set up a trust that states how and when the proceeds from your life insurance should be distributed.
Naming your estate as a beneficiary. If you name your estate as the beneficiary of your life insurance policy, the proceeds may be subject probate taxes and become vulnerable to creditors. While Florida protects life insurance proceeds named to individuals and trusts from the claims of creditors, this protection may not exist for life insurance proceeds named to your estate.
Neglecting to update your beneficiaries. It’s important to review your life insurance beneficiaries regularly to ensure your chosen beneficiaries are up-to-date. It may make sense to update your designations after a marriage, re-marriage, divorce, or child birth, or if a beneficiary passes away.
Being vague. When naming beneficiaries on your account, you should include their names, social security numbers, and addresses. You should also include information on how you want the proceeds distributed, and whether each beneficiary should receive equal portions or different amounts.
Not discussing your policy with your beneficiaries. While discussing arrangements for life after your death can be tough, it’s incredibly important to have this talk with your family and loved ones. You should let your beneficiaries know about the existence of the policy, and explain how to access it in the event of your death. This can help ensure your beneficiaries will receive the proceeds promptly and with minimal complications.
Taking out life insurance can be a powerful investment tool and an important part of your estate plan. However, as with most estate planning and investment strategies, problems can arise if you do not handle its execution properly. When setting up a life insurance policy, it’s in your best interest to consult with your estate planning attorney.
Your attorney can help you determine how to name beneficiaries in a way that ensures your family and loved ones are protected, and anticipate any problems or complications that could arise. If it is in your best interest to name a trust as your beneficiary, your attorney can help you establish the right one that ensures your wishes are honored.
About the Author:
Christopher Q. Wintter is the founder of Wintter & Associates, P.A. and a board-certified expert in Trust and Estate matters by the Florida Bar. With more than 24 years’ experience as a practicing attorney, he also serves as an instructor and faculty member for the National Institute of Trial Advocacy (NITA)—the nation’s leading provider of legal advocacy skills training to practicing attorneys—and has earned the AV® Preeminent™ rating with LexisNexis Martindale Hubbell. He was also selected for inclusion in Florida Super Lawyers for 2011 and 2012 in Estate and Trust Litigation.