Selecting the beneficiaries for your life insurance policy is an incredibly important decision that requires careful planning and regular review. Improper beneficiary designations can lead to unnecessary complications, delays in payment, and even the loss of benefits. By understanding common errors and working with an experienced estate planning attorney, you can ensure your policy beneficiaries are protected.
Review beneficiaries annually.
One of the most common yet avoidable mistakes is failing to regularly review and update beneficiary designations. Your beneficiaries should be reviewed at least annually, especially after major life events like marriage, divorce, death, or the birth of a child. An outdated beneficiary designation could accidentally disinherit a current spouse or leave the estate as a beneficiary.
For example, if you get divorced but neglect to remove your former spouse as a beneficiary, they may still receive the proceeds. Or if you fail to designate any beneficiaries, the benefits could get tied up in probate. Stay on top of beneficiary designations to prevent issues.
Avoid naming minors.
While you may want to provide for your children, naming minor children as direct beneficiaries can lead to problems. Insurance benefits to minors may get turned over to the court system, requiring management by a guardian or conservator.
This can result in unnecessary fees and the potential misuse of funds. Instead, set up a trust to receive proceeds on behalf of minors. The trust can dictate how the money is managed and distributed as the children come of age.
Don’t name those with special needs.
Be cautious when considering someone with special needs as a life insurance beneficiary. An inheritance could cause them to lose eligibility for needs-based government programs like Medicaid and SSI.
To avoid this, set up a properly drafted special needs trust. This allows the beneficiary to maintain access to vital benefits while still receiving insurance proceeds in a protected manner.
Avoid creditor issues.
If life insurance proceeds go directly to a beneficiary, they may be exposed to the beneficiary’s creditors. For example, if the beneficiary owes back taxes or has declared bankruptcy, creditors may stake a claim.
To prevent this, consider naming a trust as a beneficiary instead of an individual. Trust assets are generally protected from creditors. An estate planning attorney can help set this up correctly.
Designate Contingent Beneficiaries
Don’t just name primary beneficiaries. Be sure to also designate contingent or secondary beneficiaries who will inherit the policy if the primary beneficiary predeceases you.
This ensures the benefit doesn’t revert back to the estate by default. Contingent beneficiaries provide an important failsafe that prevents potential probate issues.
Don’t Rely on Outdated Documents
A common mistake is assuming existing legal documents like wills accurately reflect your current beneficiary’s wishes. But your will only dictates probate assets, not life insurance proceeds.
You need to directly update life insurance beneficiary forms to redirect benefits. Don’t rely on old documents or verbal instructions to convey your intentions.
Seek professional guidance.
Given the nuances and ramifications of beneficiary planning, it’s wise to work with a knowledgeable estate planning or elder law attorney. They can help you avoid costly beneficiary mistakes and ensure designations align with your overall estate plan.
An attorney can also help establish protective trusts and address special situations, like beneficiaries with disabilities. Their guidance is invaluable for avoiding future problems.
Review regularly after life changes.
As mentioned earlier, it’s essential to review your beneficiaries after major life events. For example, if you divorce and remarry, be sure your new spouse is named as the beneficiary instead of an ex-spouse. After a spouse’s death, name contingent beneficiaries to provide for children.
Also update beneficiaries after births, deaths of loved ones, job changes, or retirement. Keeping designations up-to-date prevents unwanted outcomes.
Notify Beneficiaries
Don’t keep your beneficiaries in the dark. Be sure to inform loved ones that they have been named as your life insurance beneficiaries. This ensures they understand your intentions and are aware of the policy.
Provide details like the insurer name, policy number, coverage amount, and how to file a claim. This makes the process easier during an already challenging time.
Consider alternative options.
Besides direct individual beneficiaries, you may want to explore alternate payee options like trusts, charities, funeral homes, or credit unions. These entities can also be named as beneficiaries. Discuss options with your attorney.
For example, naming a funeral home as a beneficiary can prepay final expenses and ease the burden on loved ones. There are various possibilities to consider.
Seek an insurance review.
In addition to checking beneficiaries, take time periodically to review the life insurance policy itself in terms of premiums, coverage, and length of term. An insurance professional can help ensure adequate life insurance coverage is in place and the policy still meets your needs.
Document your choices.
Once you’ve made your beneficiary decisions, document these choices so your intentions are clear. Provide copies of beneficiary forms to your attorney and trusted loved ones, and keep your own records.
This avoids potential confusion and disputes down the road. Written documentation provides important verification.
By being proactive, regularly reviewing beneficiaries, working with professionals, and documenting choices, you can avoid the all-too-common errors people make with life insurance beneficiaries. Taking the time upfront to plan properly protects your loved ones and prevents legal issues.
