Are You Making One Of These Mistakes When It Comes To Designating A Life Insurance Beneficiary?
Sure it seems like a simple question in practice, but what about the realities of it? While deciding who should obtain your life insurance benefits may seem like a no-brainer, the answer is not always as simple as it seems.
Beneficiary mistakes can be extremely costly. For example, consider the following scenario. Let’s say you invest in life insurance in your 50s and name your spouse as your beneficiary. Years later, you are separated and are with a new spouse. Have you updated life insurance policy? If not, there’s a very good chance that your new spouse will be denied all benefits.
However, this certainly isn’t the only mistake that is possible when it comes to designating a life insurance beneficiary. Life insurance can get confusing, especially if you’re not aware of all the specifications and regulations regarding your policy.
We break down for you some of the top mistakes you could be making and how you can avoid them.
1.) Not Naming A Beneficiary
Does your life insurance plan specifically name a beneficiary? While this might seem like an obvious question, many people make the mistake of forgetting to formally name a beneficiary. Often, this is because someone assumes that a beneficiary, such as their spouse, is automatically named a beneficiary or they forget about it completely. In addition, many people make the mistake of naming only one primary beneficiary. While this may seem like a wise move, it can actually be detrimental. What would happen if that beneficiary were to pass as well? It is recommended to name a second as well as a third beneficiary to be on the safe side. Always be sure to have not one, but a few beneficiaries on your policy for maximum security.
2.) Making A Minor Your Beneficiary
This is actually one of the most common mistakes by far, naming a minor as your beneficiary. As it stands, life insurance companies will not pay the proceeds directly to any minor. Minor classification varies by state, but often it will be between the ages of 18-21. Without a trust or prior legal arrangements made for someone to manage the money until the minor become of age, the court will automatically appoint a guardian. What is the drawback? A court-appointed guardian is a very costly and lengthy process. Instead, name a reliable adult to leave a child’s benefit with.
3.) Forgetting To Review Beneficiaries
Once you have life insurance, how often do you find yourself thinking about it? Chances are probably not very often. Over time, it is likely that you may forget to review your policy. However, as we all know, life changes. The individuals that you would like to be your beneficiaries now could change over time. However, if you do not update your policy to reflect this, they may well never receive a single benefit. Life insurance beneficiary cases with exes can be a long, lengthy, and often unpleasant experience. Be sure to change the beneficiary specifications as circumstances change.
4.) Not Specifying Beneficiary Conditions
While providing benefits to your children or grandchildren might be your biggest desire from life insurance, be cautious of providing a “no strings attached” benefits. Many young adults are not prepared for the financial responsibility of receiving a large lump sum of cash. One way to combat this is to set up a trust fund that divides the benefits into installments. Rather than receiving one large lump sum, beneficiaries will be given set amounts over a defined period of time. It can be financially overwhelming to receive one large lump sum, setting up payment installments can be a good way to secure your loved one’s financial future.
5.) Assuming Your Will Trumps Your Policy
Your will holds more weight than your life insurance policy right? Actually, wrong. Remember, your life insurance policy is a contract. Even if you name a different individual in your will to receive your benefits, that doesn’t mean they will be the actual recipient if there is a different name on your policy. Many people make the mistake of assuming that their will can trump all other policies. However, this is simply not the case. Your life insurance policy is as much of a legal binding document as your will is. Which is why it is so crucial to make sure that your beneficiary information is always up to date.
You know that old saying, out of sight out of mind? Well, this could not be further from the truth for most people when it comes to their life insurance policy. However, avoid falling into this trap. Be sure to update your policy regularly to reflect any major life changes.
Featured image via HuffingtonPost
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