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Naming Life Insurance Beneficiaries

Avoid These 4 Mistakes When Naming Life Insurance Beneficiaries

Purchasing life insurance is important part of estate planning.  Naming the correct beneficiaries for your life insurance will allow it to protect and support those that you leave behind. 
 
I have listed the four most common mistakes in selecting beneficiaries for your life insurance. 

1. Failing to name a beneficiary
Many people fail to name a beneficiary.   Others make the mistake of naming “my estate” as the beneficiary instead of naming a specific person. Both of these errors will mean your insurance proceeds will through probate.

If you don’t name a beneficiary, a judge will decide who receives the insurance benefits.  This process can be slow, delaying the payment of benefits for months or even years.   Moreover, probate opens up the proceeds to creditors, which can seriously deplete—or even totally wipe out—the funds.

To prevent this, make certain you name—at least—one primary beneficiary. In case your primary beneficiary dies before you, you should also name a contingent (alternate) beneficiary. For maximum protection, name more than one contingent beneficiary in case both your primary and secondary choices die before you.

2Failing to keep beneficiaries updated
Even if you have a named a beneficiary, it may not matter if you fail to update your named beneficiaries.  This is particularly true if you are in a second (or more) 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. and updated.

3. Naming a minor as beneficiary
Even if a minor child is named as a beneficiary, they will not receive any funds until the reach of majority – or 18 in many states. If you list a minor child as a beneficiary, the insurance benefits will be distributed to a court-appointed custodian. This custodian will then be in charge of managing the funds until the child reaches the age of majority, upon which the now-18 year old child receive the funds outright.

A better plan for insurance funds is to set up a trust for the insurance funds. You can name a trustee to hold and distribute  the funds for the minor child. This allows you to choose who manages the funds, but also how and when the funds are distributed and used.

4. Naming an individual with special needs as beneficiary
Although a loved one with special needs is likely one of the first people you’d think of naming as beneficiary of your life insurance policy, doing so can have tragic consequences. If you leave the money directly to someone with special needs, it could disqualify that individual from receiving much-needed government benefits.

Rather than naming someone with special needs as beneficiary, you should create a “special needs trust” to receive the insurance proceeds. This way, the money won’t go directly to the beneficiary upon your death, but it 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. In the end, special needs planning involves much more than just life insurance—it’s about providing for a lifetime of care and protection.

Don’t create problems
While naming life insurance beneficiaries might seem like a simple task, if you’re not careful, you can create major problems for the loved ones you’re trying to benefit. I am happy to meet with you to ensure that everything is completed.

I can also support you in putting in place planning tools like trusts—special needs or otherwise—to ensure the proceeds provide the maximum benefit for your beneficiaries without negatively affecting them in any way. Please feel free to reach out to get started. 

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