When you buy a life insurance policy, you should name a beneficiary. The
beneficiary to whom the proceeds would be paid first is called the Primary
Beneficiary. The secondary or Contingent Beneficiary is the person who
would be paid the proceeds if the Primary Beneficiary predeceases. This
sounds simple, but designating life insurance beneficiaries can be tricky
and when mistakes are made they may not only be tragic but expensive.
Below are some common mistakes to avoid. .
MISTAKE ONE: Not Naming a Beneficiary
If you do not name one or more beneficiaries of your insurance policy,
the proceeds will pass to your “estate” or your “heirs
at law” at your death. This means that the proceeds may pass to
individuals who you may not have intended to receive them. It also means
that the proceeds will be subject to the delays and expenses normally
associated with settling an estate in Surrogate’s Court and that
the proceeds may be attached by your creditors. Furthermore, depending
on the size of your estate, the proceeds may be subject to Federal and/or
State estate taxes.
MISTAKE TWO: Naming a Minor Child or Children as Beneficiary
If a minor child is named as a Beneficiary of a life insurance policy and
there is a guardian named in the insured’s will, the proceeds will
pass to the guardian to manage until the minor attains the age of eighteen
(18) or twenty-one (21), depending on the State, and the Guardian will
be subject to Court supervision. If there is no will or if no guardian
was appointed by the insured, the Surrogate’s Court will appoint
a guardian of its choosing, a costly process. Either way, once the child
attains the age of 18 or 21, he or she gets the money free and clear.
Depending on the amount of insurance proceeds this may be very unwise
and even harmful to the child. Instead, creating an irrevocable life insurance
trust and naming the trust as the owner and beneficiary of the life insurance
policy will allow the Trustee, a person of your choice, to manage the
proceeds until the child attains any age or ages you specify in the trust.
You may even include in the Trust specific directions regarding investing
or other instructions for the Trustee to follow. In the absence of a Life
Insurance Trust, naming your estate as the policy beneficiary when there
is also a valid will which creates a trust for minor children and appoints
a Trustee to manage the minor child’s inheritance is a better option
than simply naming the minor child as beneficiary.
MISTAKE THREE: Naming a Beneficiary who is Dependent on Government Benefits
Naming a beneficiary who is receiving Supplemental Social Security Income
(SSI) or Medicaid will put those beneficiaries at risk of losing their
benefits. Anyone who receives a gift or inheritance of more than $2,000
is disqualified under federal law from receiving SSI or Medicaid. If the
beneficiary is a special needs child a Supplemental Needs Trust should
be created and named as the policy beneficiary. This type of trust will
allow the insurance proceeds to be available for the beneficiary’s
supplemental needs without disqualifying them for government assistance.
MISTAKE FOUR: Not Updating a Beneficiary Designation
Any time you experience a life-changing event you should consider whether
the beneficiary designations on your insurance policy needs to be changed.
A marriage, a divorce, the birth of a child or even the estrangement of
a child may all signal the need to update the beneficiary designation
on your policy. Unfortunately, many people often forget to do so and it
is not uncommon to find an ex-spouse still listed as the beneficiary on
a policy. A life insurance policy is a contract between you and the insurance
company so regardless of the changes that may occur in your life, the
beneficiary you named in the contract will receive the insurance proceeds.
MISTAKE FIVE: Not Being Specific When Naming Your Beneficiaries
Beneficiaries can be listed by name or by class. It is preferable to designate
the full name of each beneficiary. Designating a group of people such
as “my children” may cause problems later on if, for example,
you have stepchildren, out of wedlock children, afternborn children or
adopted children. Even naming beneficiaries by name may cause confusion
if you name multiple beneficiaries and one of them predeceases you. Do
the proceeds get distributed “Per Stirpes”, which means “by
representation” or “Per Capita” which means “by
head”. Assume, for instance, you have two children, Larry and Beth,
and you name them each as 50% beneficiaries on your policy. Larry has
three children and Beth has two children. Suppose, Larry predeceases you,
if you had specified “Per Stirpes” on the policy, then Larry’s
three children would split Larry’s 50%. If you designated “Per
Capita” then Larry’s three children would each receive ¼
of the proceeds and Beth would get the other ¼. You should be informed
and choose the distribution that matches your intentions.
MISTAKE SIX: Assuming You Can Change an Insurance Beneficiary Designation
in Your Will
If you want to change the beneficiary designation on your life insurance
policy you must do this through the insurance company and complete the
necessary paperwork with them. You cannot change a life insurance beneficiary
in your will, the terms of your will have no effect on your agreement
with the life insurance company.
MISTAKE SEVEN: Not Telling Anyone You Have the Insurance Policy
The most important thing is telling someone you have a life insurance policy
and where to find it. This can save your family from chaos later on, or
even worse, from never claiming the proceeds. Millions of dollars of life
insurance proceeds go unclaimed each year because surviving family members
don’t know that a policy exists.
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. 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.