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.
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.
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.
Call us at (813) 902-3189.
Part 1: How do you choosing life insurance beneficiaries?
Choosing a beneficiary for your life insurance policy isn’t as easy as you might think. That’s because naming someone as your life insurance beneficiary really has nothing to do with you. Why? Because you should consider how that money will affect your beneficiary’s life once you’re gone. If you’re not careful, you might create problems for your loved ones.
Here are a few important questions you should ask yourself when choosing your life insurance beneficiary:
1. What are your goals?
Ask yourself: what do you ultimately intend to accomplish with your life insurance? For example, are you trying to replace income for your spouse and kids? Are you just trying to cover your funeral costs?
The real reason you’re investing in life insurance is something only you can answer. And that answer will put you in a better position to choose your beneficiary.
2. What are your beneficiary options?
Your primary beneficiary is your first choice. If you don’t name a beneficiary, then your life insurance goes to your estate. That means that your life insurance will end up in Probate. Your insurance company will ask you to name your top choice to get the money after your death. This is the primary beneficiary. Probate can tie up your life insurance in court for months or even years.
You should also name a backup beneficiary (a/k/a your alternate or contingent beneficiary)
For example, you can name multiple primary beneficiaries, like your children, and have the proceeds divided among them in whatever way you wish. Also, the beneficiary doesn’t necessarily have to be a person. You can name a charity, nonprofit, or business as the primary (or contingent) beneficiary.
When choosing your beneficiaries, you should ultimately base your decision on which person(s) or organization(s) you think would most benefit from the money. In general, you can designate one or more of the following examples as beneficiaries:
- One person
- Two or more people (you decide how money is split among them)
- A trust you’ve created
- Your estate
- A charity, nonprofit, or business
3. Do you have minor children?
If you name a minor child as a primary or contingent beneficiary (and he or she ends up receiving the policy proceeds), a legal guardian must be appointed to manage the funds until the child comes of age. This can lead to numerous complications, so you should definitely consult with an experienced estate planning attorney if you’re considering this option.
Check out Part Two in this series discussing the remaining three questions to consider when naming beneficiaries for your life insurance policy.