4 Common Mistakes Made On Life Insurance Beneficiary Designations

Common Mistakes in Naming Life Insurance Beneficiaries

Investing in life insurance is a critical part of estate planning, ensuring your loved ones are financially secure after you're gone. However, selecting beneficiaries for your policy requires careful consideration to avoid potential pitfalls. Here are four common mistakes to watch out for:

01 - Failing to Designate a Beneficiary

It may seem obvious, but many people overlook naming a beneficiary on their life insurance policy or mistakenly designate their "estate." Both scenarios lead to the insurance proceeds going through probate, a court process that can delay distribution and subject the funds to creditors. To keep your insurance proceeds out of probate, designate at least one primary adult beneficiary and consider naming multiple contingent beneficiaries.

02 - Neglecting to Update Beneficiaries

Failing to update your beneficiary designations can have serious consequences, especially after major life events like divorce, remarriage, births, or deaths. Forgetting to remove an ex-spouse as a beneficiary, for instance, can unintentionally disinherit your current spouse or other intended beneficiaries. Regularly review and update your beneficiaries to align with your current wishes and circumstances.

03 - Naming a Minor as Beneficiary

While technically allowed, naming a minor child as a direct beneficiary is problematic. Minors cannot directly receive insurance benefits and would require a court-appointed custodian to manage the funds until they reach adulthood, often at significant cost. Instead, consider establishing a trust to receive the insurance proceeds and designate a trustee to manage and distribute the funds according to your wishes, ensuring the minor's needs are met responsibly.

04 - Designating Someone with Special Needs Directly

Naming an individual with special needs as a direct beneficiary can jeopardize their eligibility for government benefits upon receiving the insurance payout. To safeguard their benefits and ensure proper management of the funds, create a special needs trust. This type of trust allows the proceeds to be managed by a trustee according to your instructions, without impacting the beneficiary's eligibility for essential services.

Planning for the Future

Avoiding these common mistakes requires thoughtful planning and regular reviews of your estate plan, including beneficiary designations. We can help you navigate these decisions and ensure your insurance proceeds provide maximum benefit to your loved ones without unintended consequences. Whether it's establishing trusts or updating beneficiary designations, our goal is to protect your legacy and provide peace of mind.

Get Started Today

Planning for the future starts with a conversation. Contact us to schedule a consultation and begin securing your family's financial future with a well-crafted estate plan. We're here to guide you through every step, ensuring your wishes are honored and your loved ones are protected. Call us today to take the first step toward peace of mind.

This article is a service of Zarda Law, S.C. We do not just draft documents; we ensure you make informed decisions about life and death, for yourself and the people you love. That's why we offer Legacy Planning Session, during which you will get financially organized and make all the best choices for the people you love. You can begin by scheduling a Legacy Planning Session and mention this article to find out how to get this $750 session at no charge.