Naming the life insurance beneficiary is stating who should get life insurance money after you die.
Sounds easy, but designating beneficiaries can get complicated. Mistakes are common, financial advisers say. Plus it can be heartbreaking and expensive for the family members involved. When mistakes are made, you’re not creating problems for you, you’re creating problems for the people you leave behind. Here are common life insurance mistakes to avoid:
Naming A Life Insurance Beneficiary:
Making a dependent ineligible for government benefits
Naming a lifelong dependent, such as a child with special needs, as your life insurance 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.
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.
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.
Overlooking your spouse in a community-property state
Generally, you can name anyone with whom you have a relationship as beneficiary, even a secret lover. 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 a beneficiary.
Designate Your Life Insurance Beneficiary In Community-Property States:
Community property states follow the rule that all assets acquired during the marriage are considered “community property.”
- Arizona
- California
- Idaho
- Louisiana
- Nevada
- New Mexico
- Texas
- Washington
- Wisconsin
Do not assume your Will trumps the life insurance policy. A life insurance policy is a contract. Regardless of what your will says, the life insurance money will be paid to the beneficiary listed on the policy. That’s why it’s important to contact your insurer to change your beneficiary if needed.
Forgetting to update
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. It’s not uncommon to find the ex-spouse still listed as beneficiary on the life insurance policy when reviewing a client’s portfolio.
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.
Say, for instance, 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. 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.
The problem could be avoided 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.
Neglecting details
You want to leave life insurance money to your kids and grandkids, and you want it divided evenly. But how?
Life Insurance Beneficiary
There are two ways of distributing the money – per stirpes and per capita. You can specify either method on the life insurance policy, and both are acceptable options when naming beneficiaries, but the possible outcomes can be drastically different from one approach to the other. Per stirpes means the proceeds are divided by a 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 percent.
Choose the distribution method to match your intentions. It’s recommended that you diagram the possible scenarios. Complex situations should probably have an attorney involved.
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 life insurance beneficiaries, decide whether you want the money divided “per stirpes,” which means by a branch of the family, or per capita, which means by head.
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 you as a parent to instill what you feel is valued in your absence. You don’t want to leave your children with millions of dollars when they’re 18 with unfettered access. Insurers are beginning to introduce policies that let you arrange for the death benefit to be paid out in installments.
Staying mum
The most important thing is to tell someone so they know you have a life insurance policy, are where it is and how to find it. Open communication with beneficiaries now can save family chaos later – or even worse, never claiming the benefit.
Be Sure To Name More Than One Life Insurance Beneficiary
Most people just think they’re going to make their spouse beneficiary, but don’t take into account the spouse might predecease them. It’s conceivable that something would happen to you and your spouse together.
When there is no living life insurance beneficiary, the life insurance benefit typically goes into the estate and is subject to probate. That leads to two complications.
- One, heirs might face a long wait to get the money.
- Two, the life insurance proceeds, which normally would be protected from creditors, can now be open to creditors’ claims.
It’s recommended that you name secondary and final beneficiaries. If the primary beneficiary dies before you do, then the money passes to the secondary beneficiary. If the secondary beneficiary has passed away when you die, then the death benefit goes to the final beneficiary.
Discuss Life Insurance Beneficiary Options At One Of Our 3 Insurance Offices.
We have 3 locations! Anyone of us can sit down and evaluate your individual life insurance beneficiary situation and proper life insurance coverage. We have insurance offices in Centerville (Dayton) Ohio, West Chester (Cincinnati) Ohio, and Northwood (Toledo) Ohio.
If you have any questions please contact us today to discuss life insurance beneficiary considerations.
