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There are a lot of nuances to a life insurance policy that can make a simple beneficiary designation tricky. And, even with the best of intentions, listing the wrong person can mean your loved ones will never get to see the death benefit payout.

When mistakes are made “you’re not creating problems for you,” says Keith Friedman, CEO and founder of FBO Strategies. “You’re creating problems for the people you leave behind.”

Life insurance mistakes are common. But, if you’re armed with the knowledge of the most common mistakes, you can avoid making the wrong beneficiary designation and jeopardizing your family’s financial health

Here are the top life insurance beneficiary mistakes to avoid:

1. Naming a minor child

Life insurance companies won’t pay the proceeds directly to minors. If you have someone under 18 listed as your life insurance beneficiary, the court will appoint a guardian, a costly and time-consuming process, to handle the proceeds until the child reaches 18 or 21, depending on the state. This process can sometimes take years, tying up much needed funds in court and preventing the money from being used to support your family.

To prevent this from happening, you can create a trust. You would name the trust as the beneficiary of the policy or name an adult custodian for the life insurance proceeds under the Uniform Transfers to Minor Act. You can also list the minor’s anticipated guardian as the beneficiary.

Consult an estate attorney to decide the best course.

2. Listing a lifelong dependent who could lose government benefits

Naming a lifelong dependent, such as a child with special needs, as a beneficiary could put them at risk of losing eligibility for government assistance. Anyone who receives a gift or inheritance of more than $2,000 is disqualified for Supplemental Security Income and Medicaid, under federal law. Because of this, make sure to check that leaving the death benefit in their name won’t cause them to lose other coverage. 

Work with an attorney to set up a special needs trust and name the trust as beneficiary. A trustee you appoint will manage the money for the dependent’s benefit.

Here’s more on life insurance planning for parents of children with special needs.

3. Not working with your spouse in a community-property state

Generally, you can name anyone that’s financially dependent on you as a beneficiary.

However, in community-property states, your spouse would need to waive their rights to the money if you designate anyone else as the beneficiary. There are nine community property states:

  • Arizona
  • California
  • Idaho
  • Louisiana
  • Nevada
  • New Mexico
  • Texas
  • Washington
  • Wisconsin

If you live in a community property state, make sure your spouse waives their rights if they aren’t your beneficiary.

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4. Listing three different people as the policyowner, insured, and beneficiary

Life insurance death benefits are generally tax-free. But if the policyowner, the insured, and the beneficiary are three different people, the death benefit could count as a taxable gift to the beneficiary, says Amy Rose Herrick, a chartered financial consultant and life insurance agent.

Consult a financial adviser to decide the best way to structure the policy.

5. Assuming your will overrides your life insurance policy

A will is an important financial document that distributes your estate per your wishes after you die.

However, regardless of what your will says, the life insurance money will be paid to the beneficiary listed on the life insurance policy. If your will dictates something different than your policy, the insurer will still only pay out to the beneficiary listed in your policy. That’s why it’s important to contact your insurer to update your beneficiary designation every time you experience a major life event.

6. Forgetting to update your policy on a regular basis

Designating beneficiaries isn’t something to do and then forget about, says Senior Vice President of Marketing at Global Atlantic Financial Group.

You should review your policy every few years and every time you experience a major life event, such as getting married, having children, or getting divorced. You may need to update your beneficiary designation as your circumstances change.

Unfortunately, many people forget to do so.

“Half of my practice is second or third marriages,” says Peter Blatt, President and Financial Advisor of Center For Asset Management.

Blatt found that it was quite common to find the ex-spouse unintentionally still listed as the beneficiary on the life insurance policy.

7. Keeping beneficiary designations ambiguous

Be specific when you name beneficiaries. Instead of “my children,” list their names, Social Security numbers and addresses.

Otherwise, the death benefit can be easily disputed and may take a long time to pay out.

When naming multiple beneficiaries, you should also decide whether you want the money divided per stirpes or per capita. This decision affects how you want the life insurance money to pay out and if it will protect your beneficiaries’ heirs.

8. Not telling your family about the policy

No one likes to talk about their end-of-life plans. But telling your family about the policy and providing them with all the details to file a claim is pivotal to your beneficiaries actually receiving the life insurance money you paid for.

“The most important thing is to tell someone so they know you have a life insurance policy, where it is and how to find it,” says Joshua Hazelwood, Head of Life Sales at MassMutual.

Open communication with beneficiaries now can save a family from never claiming the benefit later.

9. Naming only a primary beneficiary

If you need to provide financial protection to multiple people, you should name multiple beneficiaries.

Additionally, you may want to name a contingent beneficiary incase the primary beneficiary can’t accept the death benefit. For example, if your spouse predeceases you or dies at the same time. Without a contingent beneficiary, the policy would then pay out to your estate, which is subject to probate and creditors. This means your heirs might never receive the life insurance money.

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