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Top Mistakes When Designating a Life Insurance Beneficiary

March 19, 2015
Insurance, Life Insurance
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Deciding who should get your life insurance benefits if you die may sound simple, but mistakes can happen — heartbreaking, expensive mistakes.

For example, unintentionally leaving an ex-spouse as a beneficiary on a policy can leave your new spouse broke. And failing to designate a beneficiary means the money will go into your estate and through probate — a lengthy process that leaves your loved ones in limbo.

Avoid these major mistakes when buying life insurance and designating a life insurance beneficiary.

Naming a minor

Naming children as life insurance beneficiaries sounds like a good idea but can backfire. Insurers won’t pay life insurance benefits directly to minors. If you haven’t created a trust or designated a guardian to manage the money, a court will have to appoint a guardian until the children turn 18 or 21, depending on the state. This can cause a delay in providing financial support to the children.

Instead, set up a trust to benefit the child, and name the trust as the life insurance beneficiary. Or designate a trusted adult as custodian to administer the benefit.

Forgetting to update beneficiaries

Be sure to review your life insurance beneficiaries every couple of years, especially if you marry, divorce or have a child.

If a beneficiary passes away, you’ll want to update your designations.

Failing to update your beneficiaries could cause big problems if you die, particularly if an ex-spouse is still listed on the life insurance policy and shouldn’t be. Stay ahead of the game and review your policy from time to time.

Naming only a primary beneficiary

Naming just one person as your beneficiary isn’t the best option, since that person could die before you do. Or, if you name only your spouse, you could both die at the same time, such as in an accident.

So consider naming a secondary and even a tertiary beneficiary. That way, if the primary beneficiary dies, the money goes to the secondary beneficiary. If that beneficiary has died, then the death benefit goes to the tertiary beneficiary.

Not naming any beneficiaries

On the other end of the spectrum is not designating anyone as a beneficiary — whether intentional or not. When there’s no living beneficiary, the proceeds typically go to your estate and are then subject to probate. This can leave your loved ones with a long wait to get the money. Also, when life insurance benefits go to an estate, they can then be claimed by creditors of the estate.

Naming a person with special needs

Setting up a lifelong dependent, such as a special needs child, as your life insurance beneficiary can cause big problems. The life insurance benefits can put that person at risk of losing government assistance such as Social Security, on which many adults with disabilities rely for income.

Instead, work with an attorney to set up a special needs trust and name the trust as beneficiary. The proceeds can then be used to supplement that person’s government benefits instead of eliminating them.

Do your research so that you don’t make a mistake when designating beneficiaries. Life insurance is meant to solve problems, not create them.

Learn more about choosing a life insurance beneficiary.


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