An important part of a complete estate plan is making sure your beneficiary designations will accomplish your goals. Naming beneficiaries for your life insurance death benefits may seem simple, but designating beneficiaries requires careful preparation.
This article will discuss some life insurance beneficiary mistakes to avoid.
Naming a minor child
Life insurance companies won’t pay life insurance death benefits directly to minors. If benefits are payable to a minor child, a court appointed guardian will be required to receive the life insurance proceeds. This process will be more costly and creates unnecessary headaches for your loved one. If a guardianship is required the guardian will administer the proceeds until the child reaches 18 and generally the court will impose strict restrictions on the use of the funds.
A better alternative is to either set up a trust to benefit the minor and name the trust as the beneficiary of the policy or name an adult custodian for the life insurance proceeds under the Uniform Transfers to Minor Act. These options allow you to avoid a probate court guardianship and allow you to delay distribution of the assets. If you use a trust you may delay distribution until any age or ages that you pick. If you use the Uniform Transfers to Minor Act you may use age 21 or 25.
Making a dependent ineligible for government benefits
If your intended beneficiary, such as a child with special needs, is currently receiving government assistance such as Medicaid or Supplemental Security Income, he or she may lose eligibility for such government assistance upon receiving the life insurance benefits directly. A special needs trust will allow your intended beneficiary to maintain eligibility for government programs and have a source of funds managed by a trustee to provide for items or services not covered by the government program.
Assuming your will governs the distribution of proceeds
A life insurance policy is a contract and the distribution of the death benefit is determined by the terms of the life insurance policy and your beneficiary designations. Generally, the terms of your will do not determine how the life insurance proceeds are distributed. Your will would apply if you do not have current named beneficiaries for your life insurance policy (generally because your named beneficiary or beneficiaries have predeceased you). It is important to contact your insurance company to confirm your current beneficiaries and to change your beneficiary if needed to accomplish your wishes.
Forgetting to update
You should review your beneficiaries every two or three years and after any major life event, such as marriage, the birth of a child or divorce to make sure the beneficiaries still reflect your wishes. This is particularly important after a divorce. The divorce in and of itself does not necessarily void any beneficiary designations.
You should also keep good records of the beneficiaries named to help the person or persons handling your affairs, or if the insurance company cannot locate the beneficiary designation paperwork.
Be Clear in Your Designations
If you want to leave life insurance money to your children and/or grandchildren, and you want it divided evenly, there are two ways of distributing the proceeds — per stirpes and per capita. You can specify either method on the beneficiary designation forms, and both are acceptable options.
Per stirpes means the proceeds are divided by branch of the family, and per capita means they are divided by among one generation. If for example, you want to leave the money to your two children, Bob and Sue, or to your grandchildren if Bob or Sue predeceases you. Bob has three children and Sue has one child. Now suppose Bob dies before you do. Under per stirpes, half the money would go to Bob’s three children, and half would go to Sue. Under per capita, the money would pass all to Sue.
If you are not sure how the beneficiaries will be determined, review the designations with your insurance professional.
It is also very important to be specific when you name beneficiaries. Instead of “my children” or my “grandchildren” list their names. This may seem unnecessary, but some companies may require probate court action to determine who are your children or grandchildren if they are not named on the beneficiary form. All of this will take more time and money.
Leave a Record
Life insurance benefits can only be claimed if your loved ones know they exist. It is important to tell the person or persons who will handle your estate that you have the policy and how to find the information on the policy. Often locating current life insurance policies can be like locating a needle in a hay stack. Keeping good records will make sure that the life insurance proceeds are actually collected with the least amount of effort.
Giving money with no strings attached
We discussed above why naming minors is not a good idea, but naming your young-adult children as beneficiaries may not be best. Although they are old enough to receive the benefits without court involvement, they may not be sufficiently mature to handle the money especially during a period of grief. A trust allows you to set conditions for how the money is dispersed to the beneficiary and delaying the receipt of a large influx of money until the beneficiary reaches a certain age or ages. A trust can also make sure your goals, such as providing a college education, are accomplished.
Naming only a primary beneficiary
Many policies name a spouse as beneficiary, but do not name a contingent beneficiary. If something would happen to a couple at the same time or in quick succession, the life insurance policy will need to pass through probate. When there is no living beneficiary, the life insurance benefit typically goes into the estate and is subject to probate. Subjecting the proceeds to probate will delay the distribution to your beneficiaries and the life insurance proceeds, which normally would be protected from creditors, will now be required to pay off creditors.
It is a good idea to name a primary and contingent or secondary beneficiary. If the primary beneficiary dies before you do, then the money passes to the secondary beneficiary.
If you have any questions about your life insurance beneficiaries, please contact me using the phone number or Contact Us button below.
