Here are some of the most common mistakes people make when designating life insurance beneficiaries:
1. Trying to designate beneficiaries in your Will. Naming beneficiaries in your Will does not override a properly executed beneficiary designation form.
2. Vague beneficiary designation. Name beneficiaries as specifically as possible. Use legal names instead of naming “my children” or “my spouse.”
3. Not updating beneficiaries when circumstances change. Have you divorced? Unless you want your ex to get the proceeds on your death, be sure to update your policy designations. Review your beneficiary designations every time you have a significant life change, or at least every three years.
4. Designating a person with special needs. People with special needs may be eligible for government benefits and by naming them beneficiaries under a life insurance policy, you could make them inelegible for those benefits. A special needs trust can be set up to avoid this.
5. Not considering individual circumstances. Not everyone can responsibly handle receiving a large sum of money. Leaving money outright to a beneficiary who has drug/alcohol abuse problems, for example, can lead to more problems. Consider setting up a trust instead. A trust can also protect these assets from creditors, your child’s ex-spouse, and even bankruptcy.
6. Designating a minor. Ideally, life insurance proceeds should go to a trust for child’s benefit and not to the child directly. When a minor receives life insurance proceeds, a court decides who controls the money and when the child will receive it. Moreover, the child can be given access to the proceeds at the age of 18. I think many of us can understand why receiving a large pile of money at 18 may be disastrous. A Personal Family Lawyer can help you plan the best way to leave life insurance proceeds to children.
