insure logo

Why you can trust

quality icon

Quality Verified

At, we are committed to providing honest and reliable information so that you can make the best financial decisions for you and your family. All of our content is written and reviewed by industry professionals and insurance experts. We maintain strict editorial independence from insurance companies to maintain our editorial integrity, so our recommendations are unbiased and are based on a comprehensive list of criteria.

Naming who should get the life insurance money after you die sounds simple, but designating beneficiaries can get tricky. Life insurance mistakes are common, financial advisers say. They can be heartbreaking and expensive, too.

When mistakes are made “you’re not creating problems for you,” says Keith Friedman, principal of FBO Strategies, an estate planning and insurance firm in Stamford, CT. “You’re creating problems for the people you leave behind.”

Here are 10 life insurance beneficiary mistakes to avoid:

1. Naming a minor child

Life insurance companies won’t pay the proceeds directly to minors. If you haven’t created a trust or made any legal arrangements for someone to manage the money, the court will appoint a guardian, a costly process, to handle the proceeds until the child reaches 18 or 21, depending on the state.

Instead, you can leave the money for the child’s benefit to a reliable adult; set up a trust to benefit the child and 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. Consult an estate attorney to decide the best course.

Key Takeaways

  • When you name a lifelong dependent as your beneficiary, you put them at the risk of losing eligibility for government assistance.
  • Make sure to review your insurance policy every three years, even after big life such events such as getting married or after having kids.
  • When you name your beneficiaries, be very specific, include their names, Social Security number as well as their address.
  • Life Insurance death benefits are tax-free when there is just one person playing the roles of policy owner, insured and beneficiary.

2. Making a dependent ineligible for government benefits

Naming a lifelong dependent, such as a child with special needs, as beneficiary puts the loved one at risk for 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. So, you want to be careful about leaving money that will cause someone 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. Overlooking your spouse in a community-property state

Generally, you can name anyone with whom you have a relationship as beneficiary.

However, in community-property states, your spouse typically would have to sign a form waiving rights to the money if you designate anyone else as beneficiary. Here are the community-property states:

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

4. Falling into a tax trap

Life insurance death benefits are generally tax-free — except when three different people play the roles of policy owner, the insured, and the beneficiary. In that case, the death benefit could count as a taxable gift to the beneficiary, says Amy Rose Herrick, a chartered financial consultant and life insurance agent with offices in the U.S. Virgin Islands and Tecumseh, KS.

For example, a wife owns a life insurance policy on her husband’s life and names their adult daughter as beneficiary. The wife effectively is creating a gift of the policy proceeds to her daughter, Herrick says. The person who makes the gift — the wife — is the one who would be subject to the tax, if the amount of the gift exceeds federal limits.

You could avoid the problem in most cases by having the husband own the policy, insuring himself. However, the situation can get tricky in community-property states. Consult a financial adviser to decide the best way to structure the policy.

5. Assuming your will trumps the policy

Like life insurance, a will is important for securing your family’s financial future. Both play critical roles in helping your loved ones after you’re gone.

If you don’t have a will, you can create one fairly easily by downloading a will form for free. Fill it out, making sure you include your life insurance policies. Listing your life insurance policies in your will can help loved ones to know that the coverage exists and can point them in the right direction in terms of collecting the benefit.

It’s important, however, to know that regardless of what your will says, the life insurance money will be paid to the beneficiary listed on the life insurance policy. That’s why it’s important to contact your insurer to change your beneficiary, if needed.

See more information on wills vs. life insurance policies: Who’s the boss?

6. Forgetting to update

Designating beneficiaries isn’t something to do and then forget about, says Tara Reynolds, vice president at MassMutual.

You should review your policy every three years and after major life events, such as marriage, having children or divorce. Change the beneficiaries when circumstances change.

Unfortunately, many people forget to do so.

“Half of my practice is second or third marriages,” says Peter Blatt, a tax attorney and financial adviser in Palm Beach Gardens, FL. “It’s not uncommon to find the ex-spouse still listed as beneficiary on the life insurance policy” when reviewing a client’s portfolio.

7. Neglecting details

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

Otherwise, the insurance company has to launch a search and that can take a lot of time.

When naming multiple beneficiaries, decide whether you want the money divided “per stirpes,” which means by branch of the family, or per capita, which means by head. 

This situation happens when you want to leave life insurance money to your kids and grandkids and you want it divided evenly.

There are two ways of distributing the money — per stirpes and per capita. You can specify either method on the life insurance policy. Both are acceptable options when naming beneficiaries, says Ed Graves, a former professor of insurance for The American College. “But the possible outcomes can be drastically different from one approach to the other.”

Per stirpes means the proceeds are divided by branch of the family, and per capita means they are divided by head.

Say, for instance, you want to leave the money to your two children, Bob and Sue, or to your grandchildren if Bob or Sue predeceases you. Bob has three children and Sue has one child. Now suppose Bob dies before you do.

Under per stirpes, half the money would go to Bob’s three children and half would go to Sue. Under per capita, the money would be divided equally among Bob’s three children and Sue; each would get 25%.

Choose the distribution method to match your intentions. Graves recommends you diagram the possible scenarios.

8. Staying mum

No one likes to think about life insurance. It’s morbid and makes you confront your mortality. However, it’s wise to tell your beneficiaries about your life insurance policies. 

“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, vice president at MassMutual.

Open communication with beneficiaries now can save a family from chaos later — or even worse, never claiming the benefit.

9. Giving money with no strings attached

Naming your young-adult children as beneficiaries without setting any conditions for how the money is dispersed can be a setup for financial failure.

How many 18- or 21-year-olds can handle a huge influx of cash? One way is to set up a trust with specifics for how the money can be released and what it can be used for until the young adult reaches a certain age.

“It allows me as a parent to instill what I feel is valued in my absence,” Friedman says. “I don’t want to leave my children with millions of dollars when they’re 18 with unfettered access.”

Insurers often have policies that let you arrange for the death benefit to be paid out in installments. 

10. Naming only a primary beneficiary

Most people don’t take into account the spouse might predecease them. However, that could happen. Or the two of you might pass away at the same time. 

Blatt says he even sees cases where people fail to name any beneficiaries. When there is no living beneficiary, the life insurance benefit typically goes into the estate and is subject to probate. That leads to two complications:

  • Heirs might face a long wait to get the money.
  • The life insurance proceeds, which normally would be protected from creditors, can now be open to creditors’ claims.

Advisers recommend naming secondary and final beneficiaries. If the primary beneficiary dies before you do, the money passes to the secondary beneficiary. If the secondary beneficiary has passed away when you die, the death benefit goes to the final beneficiary.

See’s Best Life Insurance Companies