Life insurance is an important part of estate planning and taking care of the people you love after you pass away. Here are some common mistakes that you should avoid.
1. Not naming a beneficiary
Too many people forget to name a beneficiary or backup beneficiaries. Those mistakes can result in your life insurance proceeds having to go through the probate court process. That can tie up your money for months and even open up the life insurance proceeds to your creditors. And that can wipe out your funds.
2. Naming an individual as beneficiary to take care of that money for someone else
You might be tempted to list someone you know and trust as beneficiary of your life insurance, with the understanding that he or she would use that money to take care of another person that you have in mind. This could result in a number of problems. For example, you list your sister as beneficiary of your life insurance so that she can take care of your daughter. There is a difference between a legal obligation and a moral obligation. Morally your sister should use that money to take care of your daughter, but legally, it would be your sister’s money. Moreover, what if your sister passes away after she receives the life insurance proceeds? Then that money would be lost to your sister’s estate and your wishes may never be carried out. Or what if your sister had issues with creditors? Those life insurance proceeds could be at risk as soon as she commingles those funds with her own.
3. Not keeping your beneficiaries up to date
Too many people forget to update their beneficiary designations. You should review your beneficiary designations at least once a year so that you can make sure you update them upon events like divorce, deaths, and births.
4. Naming a minor as beneficiary
We see this ALOT. And it can result in expensive and time consuming complications for your family. That is because in Florida, minor children can’t directly inherit assets over $15,000. If a minor is listed as the beneficiary, the proceeds of your insurance will be distributed to a court-appointed custodian (guardian of the property), who will be in charge of managing the funds (often for a fee) until the age of majority, at which point all benefits are distributed to the beneficiary outright.
This is true even if the minor has a living parent! That child’s living parent would need to petition the court to be appointed custodian (guardian of the property).
Instead of naming a minor as beneficiary, consider setting up a trust to receive the insurance proceeds, and name a trustee to hold and distribute the funds to a minor child you would want to benefit from your insurance proceeds. By doing so, you get to choose not only who would manage your child’s money, but also how and when the funds are distributed and used.
5. Naming an individual with special needs as beneficiary
If a loved one has special needs, chances are you want to help provide for a lifetime of care and protection. But if you leave the money directly to someone with special needs, it could disqualify that individual from receiving much-needed government benefits. Consider creating a “special needs trust” to receive the insurance proceeds. That 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.
You owe it to your loved ones to get this right.
Naming life insurance beneficiaries might seem pretty straight forward. But if you mess this up, you can create pretty big problems for the people you love. But don’t worry, we can support you in planning for the people you love, whether it’s through life insurance or other tools such as wills or trusts. Schedule an estate Planning Session to get started.
This article is a service of the Law Firm of Myrna Serrano Setty, P.A. We don’t just draft documents, we help you make informed and empowered decisions about life and death, for yourself and the people you love. That’s why we offer a Planning Session, during which you will get more financially organized than you’ve ever been before, and make all the best choices for the people you love. Call our office today to schedule a Planning Session. Mention this article to learn how to get this $500 session at no charge.