Often when people purchase a life insurance policy, they fill out the paperwork at the beginning (which includes an initial beneficiary designation) and then simply pay the premiums and do nothing else. However, most often people do not realize that they make a bad choice for beneficiaries at the beginning or fail to update the beneficiaries when needed. At Wiley Law, LLC, we review our client’s designations to ensure they will work properly with any planning put in place. Here a 5 common mistakes when designated beneficiaries.
1. Failing to update the beneficiary designation:
The beneficiary named when a policy is obtained may not be the appropriate beneficiary at a later date. Beneficiary designations should be reviewed every two to three years and upon important life events like births, deaths, divorces, and significant changes in asset makeup. At Wiley Law, LLC, we review insurance designations on a yearly basis with all clients enrolled in any of our annual maintenance plans.
2. Not naming a contingent beneficiary:
It is important to name contingent beneficiaries and update the beneficiaries often. Many people simply name one beneficiary assuming it will ultimately go to that person. However, if the beneficiary passes away or declines to accept the proceeds, the money will then most likely be placed into the probate estate. This could result in increased costs associated with distributing those proceeds, and the money may go to an unintended beneficiary, such as a minor or a distant relative.
3. Naming a minor as a beneficiary:
Parents most often obtain life insurance to provide for their children in case they die before the children are grown and taking care of themselves. However, insurance proceeds directly to a minor will likely be subject to probate court oversight and control which leads to increased costs, and possible unintended consequences. The solution is to leave the proceeds in a trust for the benefit of the minor child. This allows the policy holder to control how the policy proceeds are used and at what age the beneficiary has access to the proceeds without court supervision.
4. Naming a beneficiary who receives needs based government benefits:
Many people also obtain insurance knowing that a family member with special needs will require help after they pass away. However, directly giving insurance benefits to a special needs individual could have very drastic results such as making the person ineligible from important public benefits. Creating a trust with the special needs person as the beneficiary eliminates gifting issues and family conflict issues that often occur when a sibling or other family member is named as the beneficiary of an insurance policy whose proceeds are intended to be used for the person with special needs.
5. Assuming a Trust controls the insurance policy beneficiary designation:
Many people create living trusts and assume that their estate plan, including the distribution of insurance proceeds, is taken care of. This is wrong. The life insurance policy beneficiary designation controls where the money is distributed, not the trust. To ensure that the life insurance proceeds become part of the trust and are distributed in accordance with the provisions of the trust, the trust needs to be named the beneficiary of the life insurance policy.
The process for naming life insurance beneficiaries is a very important decision in the estate planning process. This is something we assist all of our planning clients with. If you should have any questions, please feel free to contact our attorneys.