Investing in life insurance is a foundational
part of estate planning, and when done right it’s a primary way to say “I love
you” to your loved ones after you are gone. However, when naming your policy’s
beneficiaries, several mistakes can lead to potentially dire consequences for
the people you’re investing to protect and support.
The following four mistakes are among the most
common we see clients make when selecting life insurance beneficiaries. If
you’ve made any of these errors, contact us immediately, so we can support you
to change your beneficiary designations on your policy and ensure the proceeds
provide the maximum benefit for those you love most.
01 -
Failing To Name A Beneficiary
Although it would seem common sense, far too
many people fail to name any beneficiary on their life insurance policies or
inadvertently name their “estate” as beneficiary. Both of these errors will mean your insurance
proceeds must go through the court process known as probate. Sadly, this is a
mistake my father-in-law made a number of years ago!
During probate, a judge will determine who
gets your insurance death benefits. This process can tie the benefits up in
court for months or even years, depending on who the beneficiaries of your
estate are under the law. Moreover, probate opens up the proceeds to creditors,
which can seriously deplete—or even totally wipe out—the funds. In our case, notice had to go out to a
disinherited beneficiary.
To keep your insurance proceeds out of court,
make certain you designate—at the very least— one primary adult beneficiary. In
case your primary beneficiary dies before you, you should also name a
contingent (alternate) beneficiary. Name more than one contingent beneficiary
for maximum protection in case your primary and secondary choices die before
you.
Ideally, we often recommend that the primary
beneficiary of your life insurance is the Trustee of a well-considered and
thoughtful Trust Agreement to provide maximum benefit and protection for your
heirs. We can help you put together a
well-thought-out trust.
02 -
Forgetting To Update Beneficiaries
While failing to name any beneficiary is a
huge mistake, not keeping your beneficiary designations up-to-date can be even
worse. This is particularly true if you are in a second (or third) marriage and
fail to remove an ex-spouse as beneficiary, which can leave your current spouse
with nothing when you die.
To prevent this, you should review your
beneficiary designations annually as part of an overall review of your estate
plan and immediately update your beneficiaries upon events like divorce,
deaths, and births. For our clients, we have built-in systems to ensure their beneficiary
designations (along with all other documents and decisions in their plan) are
regularly reviewed and updated.
03 -
Naming A Minor (Or Their Guardian) As Beneficiary
You are technically permitted to name a minor
child as a beneficiary of your life insurance, but it’s never a good idea.
Minor children cannot receive insurance benefits until they reach the age of
maturity—which can be as old as 21 in some states. In the event a minor is
listed as beneficiary, the proceeds of your insurance will be distributed to a
court-appointed custodian, who will manage the funds (often for a significant
fee) until the child reaches the age of maturity. At that point, all benefits
are distributed to the beneficiary outright and unprotected.
This is true even if the minor has a living
parent. A child’s living parent could petition to the court to be appointed
custodian. Still, there is no guarantee that a parent would be appointed
custodian, especially if the parent cannot qualify or pay for a bond. In many
cases, a court could deem a parent unsuitable (if they have poor credit, for
example) and instead appoint a paid fiduciary to control the funds.
Rather than naming a minor as a beneficiary,
some might consider naming the person chosen as guardian of your child. But
that’s not the right answer either. In that case, all insurance would pay
outright to the named guardian and could be used in any way they choose, or
even be at risk of being taken in a divorce or by a judgment creditor of the
guardian.
Instead, the right answer is to set up a trust
to receive the insurance proceeds and name a trustee to hold and distribute the
funds to a minor child you would want to benefit from your insurance proceeds,
when and how you determine, or even hold them protected for your beneficiary to
control but safe from divorce and creditors if you choose.
04 -
Naming An Individual With Special Needs As Beneficiary
Although a loved one with special needs is
likely one of the first people you’d consider naming as beneficiary of your
life insurance policy, doing so can have disastrous consequences. Leaving
insurance directly to someone with special needs could disqualify that
individual from receiving much-needed government benefits.
Instead, create a “special needs trust” to
receive the insurance proceeds. This way, the money won’t go directly to the
beneficiary upon your death and would be managed by the trustee you name and
dispersed according to the trust’s terms without affecting benefit eligibility.
The rules governing special needs trusts are
complicated and vary greatly from state to state, so if you have a child with
special needs, meet with us today to discuss your options.
Eliminate
Future Problems Now
While naming life insurance beneficiaries might
seem simple, if you’re not careful, you can create major problems for the loved
ones you’re doing your best to benefit. We can also support you in planning
tools like trusts—special needs or otherwise—to ensure your insurance proceeds
provide the maximum benefit for your beneficiaries without negatively affecting
them. Meet
with us today to ensure you’ve done everything properly.
This
article is a service of Ganvir Law, Personal Family Lawyer®. We do not just
draft documents; we ensure you make informed and empowered decisions about life
and death, for yourself and the people you love. That's why we offer a Family
Wealth Planning Session™, during which you will get more financially organized
than you’ve ever been before and make all the best choices for the people you
love. You can begin by calling our office today to schedule a Family Wealth
Planning Session and mention this article.
The content is sourced from Personal Family
Lawyer® for use by Personal Family Lawyer firms, a source believed to be
providing accurate information. This material was created for educational and
informational purposes only and is not intended as ERISA, tax, legal, or
investment advice. If you are seeking legal advice specific to your needs, such
advice services must be obtained on your own separate from this educational
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