Investing in life insurance constitutes a fundamental aspect of estate planning, serving as a primary means to express your love and support for your family even after your passing. Nevertheless, errors in naming life insurance beneficiaries can lead to potentially severe consequences for those you aim to safeguard. The following are four common mistakes observed in the selection of life insurance beneficiaries, and if you’ve made any of these, contact us promptly for assistance in modifying your beneficiary designations to maximize benefits for your loved ones.
01 – Failure to Designate a Beneficiary
Despite its apparent common sense, many individuals, whether intentionally or inadvertently, neglect to name a beneficiary on their life insurance policies. Alternatively, they mistakenly designate their “estate” as the beneficiary. Both oversights result in subjecting your insurance proceeds to the probate court process. Probate involves a judge determining the distribution of your insurance death benefits, potentially prolonging the process for months or even years. Moreover, probate exposes the funds to creditors, risking substantial depletion or complete loss.
To circumvent probate, it’s crucial to designate at least one primary adult beneficiary. Additionally, in case the primary beneficiary predeceases you, name a contingent (alternate) beneficiary. For added protection, consider naming multiple contingent beneficiaries in the event both primary and secondary choices predecease you. Optimal protection often involves designating the Trustee of a well-structured Trust Agreement as the primary beneficiary.
02 – Neglecting to Update Beneficiaries
While failing to designate any beneficiary is a significant mistake, neglecting to update beneficiary designations can be even more detrimental. This oversight becomes particularly critical in subsequent marriages, where failing to remove an ex-spouse as a beneficiary can leave your current spouse with nothing upon your demise. Periodic reviews, ideally conducted annually as part of an estate plan assessment, ensure beneficiary designations are current. Immediate updates are necessary in the event of life changes, such as divorce, deaths, or births. As our client, we implement systems to routinely review and update beneficiary designations and all other plan-related decisions.
03 – Naming a Minor (or Their Guardian) as Beneficiary
While technically allowed, naming a minor child as a life insurance beneficiary is ill-advised. Minors cannot access insurance benefits until reaching the age of maturity, which may extend up to 21 in some states. In such cases, the insurance proceeds are administered by a court-appointed custodian, incurring management fees until the child reaches maturity, at which point the benefits are distributed outright and unprotected.
Even if the minor has a living parent, the court may appoint a custodian unrelated to the parent. Naming the guardian of the child is not a suitable alternative, as it grants outright access to the insurance funds with no protective measures. A more prudent approach is to establish a trust to receive the insurance proceeds, appointing a trustee to manage and distribute the funds for the minor’s benefit, safeguarding them from potential divorce or creditor claims.
04 – Naming an Individual with Special Needs as Beneficiary
While someone with special needs may be a primary consideration for a life insurance beneficiary, direct naming can lead to adverse consequences. It may disqualify the individual from essential government benefits. Instead of designating a person with special needs as a beneficiary, creating a “special needs trust” to receive the insurance proceeds is advisable. This arrangement ensures that the funds are managed by a designated trustee and dispersed according to the trust’s terms, preserving eligibility for benefits.
Special needs planning extends beyond life insurance, encompassing a comprehensive strategy for a lifetime of care and protection. Given the complexity and state-specific nature of special needs trust regulations, consult with us to explore viable options for your child with special needs.
Prevent Future Challenges Today
While naming life insurance beneficiaries may seem straightforward, inadvertent mistakes can have significant implications for your loved ones. Schedule a Family Wealth and Estate Planning Session with us, your Family Wealth and Estate Attorney, to ensure proper execution. We can provide additional support in implementing tools such as trusts—special needs or otherwise—to maximize benefits from your insurance proceeds while safeguarding your beneficiaries. Initiate the process today for a secure and well-planned future.
This article is presented by Michelle Bell, an expert in estate planning and business succession services. Our office provides comprehensive legal support for businesses, assisting you in making informed decisions throughout your entrepreneurial journey and in planning for future contingencies. We also offer a specialized session where we review your business’s legal structures. To arrange this consultation, please click the following link: https://calendly.com/mcblawpllc/30min.
The information in this article is intended purely for educational and informational use and should not be considered as advice on ERISA, tax, legal, or investment matters. For advice specifically tailored to your unique situation, such advice should be sought independently from this educational content.