2. Buying life insurance to benefit multiple people but naming only one beneficiary
Attorney and estate planning expert Andy Mayoras in Troy, Mich., says some people buy life insurance with the intention that several heirs will split the proceeds. But policyholders -- especially parents -- often make the mistake of naming just one beneficiary under the misguided assumption that the named beneficiary will properly divide the insurance money.
The named beneficiary might be the oldest child, the one deemed most fiscally "responsible" or perhaps the child closest to the parent. Conversely, parents sometimes opt not to name certain adult children as beneficiaries because the child has credit problems or a shaky marriage that may end in divorce. Whatever the case, if just one person is named as beneficiary and the intent is for the money to be divided among multiple parties, you’re asking for trouble.
"Don't assume that whoever you name is going to do the right thing and share," says Mayoras, co-founder and director of The Center for Probate Litigation, a division of Barron, Rosenberg, Mayoras & Mayoras, P.C. in Michigan. "That's a common mistake and the source of a lot of legal disputes over life insurance."
The solution: Name multiple beneficiaries and spell out the percentage each person should receive. Alternatively, "put the life insurance in a trust, naming the trustee as the beneficiary. Then specify in the trust who gets what part of the life insurance and why," Mayoras recommends.
Pages in this slideshow:
- 5 ways to screw up your life insurance
- 1. Neglecting to tell your beneficiaries that you even have life insurance
- 2. Buying life insurance to benefit multiple people but naming only one beneficiary
- 3. Forgetting to update crucial personal information
- 4. Repeatedly dipping into the cash value of your life insurance
- 5. Dying with a large, underutilized cash value