If you make a mistake when naming beneficiaries of your life insurance
policies, the people you love the most could end up getting hurt. In this
article, we have put together a list of 10 life insurance beneficiary
mistakes which you must try to avoid, and how best to fix them:
1. Naming Minor Children. If proceeds of your life insurance are payable to your minor children
(instead of to a trust for their benefit), a Judge will decide who controls
the proceeds and when your children receive them. What’s more, your
children could get access to all of that money at age 18! If you have
minor children, create an irrevocable trust to be the owner and beneficiary
of your life insurance policies.
2. Naming a Person with Special Needs. By naming an adult or a child with special needs who is or may become
eligible for government benefits as a beneficiary, you could unwittingly
disqualify them from receiving those benefits. Instead, you should create
and name a special needs trust as the beneficiary.
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 (Arizona, California, Idaho, Louisiana,
Nevada, New Mexico, Texas, Washington and Wisconsin), your spouse will
need to sign a waiver before you can name someone else as beneficiary.
Furthermore, 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 generally income tax-free, they could
be subject to the estate tax upon the insured’s death if he or she
is also owner. Once again, by creating and naming an irrevocable trust
to be the owner and beneficiary, you can provide income and estate tax
free distributions of insurance proceeds.
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.
A Will only controls those assets in your name which do not have any joint
owners with rights of survivorship or any named beneficiaries.
6. Failing to Update your Beneficiary Designations. Many people, such as ex-spouses and estranged relatives, are enriched
by a life insurance benefit because the insured forgot to update the policy's
beneficiary form. Always review your beneficiary designations every time
you have a significant life change, or at least every couple of years.
7. Not Being Specific. Over the years, family members may change, and so do names. You should
name your insurance 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 or your attorney
about it. Otherwise, it may be overlooked and the benefit never claimed.
This is particularly true in the digital age when most transaction are
conducted on line with little or no paper trail.
9. Not Considering Individual Circumstances. You can unwittingly create major problems if you leave a large sum of
money to someone with a substance abuse problem, someone in a bad marriage,
or just someone not equipped to handle money. In these cases, consider
establishing a trust that can protect your beneficiaries' inheritance.
10. Naming Only One Beneficiary. If you name only one beneficiary of your insurance policy and that beneficiary
dies before you or at the same time, the proceeds of your insurance could
go end up being distributed to your heirs as law as directed by State
law or a Judge. To prevent this from happening, name successor beneficiaries.
At the Law Offices of Steven M. Adler, PLLC, we can advise you on how to
best protect your insurance proceeds from creditors, divorce, and even
your own beneficiaries themselves for multiple generations. If you would
like to learn more about protecting the inheritance you'll leave behind,
call our office today to schedule a time for us to sit down and talk.