10 Common Mistakes When Naming Life Insurance Beneficiaries

If you make a mistake in naming life insurance beneficiaries, the people you love will end up being hurt.  Insure.com recently provided a list of the 10 life insurance beneficiary mistakes to avoid.  Here is my take on how to fix mistakes when naming life insurance beneficiaries.


The 10 Mistakes When Naming Life Insurance Beneficiaries

1.  Naming minor children.  If proceeds of your life insurance are directed to your minor child (instead of to a trust for his/her benefit), a Judge will decide who controls the proceeds and when your child receives them.  And your child could get access to all of that money at 18! That’s bad news. And unnecessary.

2.  Naming a person with special needs.  By naming a child with special needs child or another person eligible for government benefits as a beneficiary, you could unwittingly disqualify them from receiving those benefits. Instead, you could name a special needs trust. We can help you with that.

3.  Not considering community property and/or spousal rights.  You don’t have to name your spouse as a beneficiary, but if you live in a community property state, your spouse will need to sign a waiver before you can name someone else as beneficiary. And, if you name a married adult child as the beneficiary of your policy (without a trust), you could be putting your child’s inheritance at risk inadvertently.

4.  Ignoring tax consequences.  While life insurance proceeds are usually income tax-free, they are subject to the estate tax.  Talk to us about these issues so we can identify any traps for the unwary. If you have a taxable estate, there are solutions available to keep your life insurance proceeds out or your taxable estate.

5.  Trying to use your Will.  A properly executed beneficiary designation form always trumps your Will, so don’t make the mistake of thinking you can change beneficiaries by naming someone else to receive insurance proceeds through your Will.

6.  Failing to update.  Many ex-spouses are enriched by a life insurance benefit because their ex-spouse forgot to update the policy’s beneficiary form.  Review your beneficiary designations every time you have a significant life change or at least every three years.

7.  Not being specific.  You should name your beneficiaries in as specific a manner as possible, which means using their legal names, not just a designation such as “my spouse” or “my children.”

8.  Not informing family or losing track of policies.  If you have a life insurance policy, tell your family about it.  Otherwise, it may be overlooked and the benefit never claimed.

9.  Not considering individual circumstances.  If you leave a large sum of money to an adult child with a substance abuse problem or someone not equipped to handle money, this can lead to more problems.  Consider establishing a trust that can protect your beneficiaries’ inheritance.  We can even protect these assets from bankruptcy, creditors, and divorce for multiple generations.

10.  Naming only one beneficiary.  If you name only one beneficiary and that beneficiary dies at the same time, or before you, the proceeds of your insurance could go end up directed by State law or a Judge.  To prevent this from happening, name secondary and tertiary beneficiaries.

The good news is that you can correct any and all of these mistakes you may have made when naming life insurance beneficiaries. If you are concerned that you may have made one or more of these mistakes, give us a call 503-850-8345 to discuss your options.

Photo: Life Insurance Street Sign On Wall Street - Investment Zen - CC BY 2.0

About the Author Donald Rolfe

Father, husband, entrepreneur, and owner of a trivia filled brain. I help families and individuals plan for the unexpected and end of life. Schedule a Complimentary Strategy Session to chat with me, get answers to your questions, and find out about your Estate Plan options.

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