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Common Life Insurance Mistakes

Life Insurance.jpgLife insurance is one of the largest assets in a person's estate, so who you designate as the beneficiary of the policy is a major decision (especially since this designation controls over what your will or trust say).

Making a mistake on your beneficiary designation can sabotage your estate planning, cause unnecessary expense for your estate, and create problems for your beneficiaries.

Here are some of the most common mistakes you should avoid . . .

Mistake No. 1: Naming Your Estate

Your estate can end up being the beneficiary if (1) you name your estate as beneficiary; (2) you fail to name a beneficiary; or (3) all of your named beneficiaries die before you.

The problem with your estate receiving the proceeds is that your beneficiaries cannot access the money until they go through probate, which will take several months and cost thousands of dollars. Going through probate will also expose the proceeds to creditors of your estate. Finally, the beneficiaries of your estate may not be the people that you wish to receive the insurance proceeds, or they could be the right people receiving in the wrong way (discussed below). This is an inefficient, unpredictable, and risky way to leave insurance proceeds.

Mistake No. 2: Naming Minors

Minors may end up beneficiaries of a life insurance policy directly or indirectly. In either scenario, the problem is the same, the law does not allow minors to receive the proceeds. The insurance company will insist on distributing the money to a court-appointed guardian. It may surprise you to know that a parent of a child is not automatically the legal guardian of the child's estate. So, it is not uncommon that a parent must apply to become guardian of their child's estate in order to receive life insurance proceeds left to the child. This is an inefficient and expensive way to leave the proceeds.

Mistake No. 3: Naming an Incapacitated Person

Similar to naming a minor, an incapacitated person will not be able to receive and use the proceeds on their own. Therefore, a court-appointed guardian will have to be appointed to collect and manage the proceeds. This problem can be complicated further if the incapacitated person is receiving government benefits.

Mistake No. 4: Naming Beneficiaries Who Receive Government Benefits

Medicaid has an extremely low resource limit. So, even a small policy can jeopardize a beneficiary's eligibilty for government benefits. Failing to take this into consideration can create serious problems for a beneficiary, including loss of much needed government assistance.

Mistake No. 5: Naming Spendthrifts or At-Risk Beneficiaries

Life insurance is great for providing your family with easy access to large sums of cash. But this may not be appropriate for beneficiaries who are not financially responsible or could become targets. A beneficiary could be too young to manage the money, too irresponsible, a target for creditors, or surrounded by people who want to use the money for themselves. Your gift could be squandered or end up in the wrong hands.

Armed with this knowledge, you should review the beneficiary designation on your life insurance policy to see whether you have committed one of the mistakes above. If you have, then you need to take immediate action to correct it.

Check back next week for an article discussing solutions to these common mistakes.

In the meantime, if you have any questions or concerns about your beneficiary designations or overall estate plan, call us to schedule an estate planning strategy session.

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