When naming a life insurance beneficiary, one may think it is as simple as writing a name on a line. The truth is that many people make minor mistakes when naming life insurance beneficiaries. Today we would like to share some common mistakes people make in regards to life insurance beneficiaries in hopes to help save your family stress and financial headaches.
10 Life Insurance Beneficiary Mistakes to Avoid.
- Naming A Minor. If you want to leave your life insurance to a minor child they will not be able to be paid out until they are 18 or 21 (in some states). So you cannot name them as the beneficiary in the living trust. You must name an adult as the trustee to manage the account until the child is old enough to receive the money at the appropriate age.
- Ineligibility for Children with Special Needs. If you leave all your money to a child with special needs, they are considered ineligible for any government medical or financial assistance if the amount left is over $2,000. Creating special needs trust may be an important planning tool to consider.
- Community-Property States. Arizona is one of many community property states. If you did not want to name a spouse as beneficiary they must sign a waiver and you would need to name another beneficiary in your will or living trust.
- Tax Traps. In general, life insurance is deemed as a tax-free gift unless more than two people are involved. If you and your spouse share a life insurance policy and you want to leave the money to a child, then the government may be entitled to tax the money. If you and your spouse create separate policies then the money left to the child will not be taxed. You may then just name your child as the beneficiary on the policy.
- Will vs. Insurance Policy. You must name the right beneficiary on your life insurance policy and in your will. Even if it is the same person receiving all money you must place the proper name in each legal document. If you want a separate individual to receive life insurance money and another to be the beneficiary of your estate you must state this in each individual document.
- Updating Information. You need to review your life insurance policy each year and update accordingly as life changes. If you get divorced you need to make sure your ex-spouse is not still listed as a beneficiary, or if you decide later on to leave the money for a child to use for college the name of the beneficiary needs to be changed to the child’s name. Constantly updating information is very important.
- Forgetting Details. If you want to divide life insurance amongst a number of individuals you need to add specific information in regards to how you want the money divided. Do you want it divided equally among all children? Do you want grandchildren to receive a specific amount? Creating a detailed list of how to divide the life insurance policy is not something to neglect.
- Communicate. Make sure that beneficiaries of your Will are informed as to where a life insurance policy is being held and how to go about collecting the money. This will help to make sure the money does not go unclaimed.
- No-strings Attached. Leaving large sums of money to young adults (18-21) is not always wise to do and you may want to consider setting up a schedule of reimbursement. Life insurance companies are allowing people to set up policies that allow the death benefit to be paid out to children in installments to ensure that they do not inherit large amounts of money that they are not yet responsible enough to handle.
- Name Multiple Beneficiaries. If you fail to update information regularly then it may be wise to name multiple beneficiaries on your life insurance policy. In case something happens to the primary beneficiary before you die, name a secondary and a final beneficiary to receive the money from your life insurance policy.
At Estrada Legal, we specialize in planning for your peace of mind. If you have questions in regards to your life insurance policies and how to tailor them to your estate plan or your Living Trusts please contact us today.
This article was created based off of the content provided by Fox Business.