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7 ways to screw up when picking life insurance beneficiaries

Naming who should get the life insurance money after you die sounds simple, but designating beneficiaries can get tricky.

Mistakes are common, financial advisers say — and they can be heartbreaking and expensive.

When mistakes are made “you’re not creating problems for you.”  “You’re creating problems for the people you leave behind.”

Here are 7 life insurance beneficiary mistakes to avoid.

  1. Naming a minor child

Life insurance companies won’t pay the proceeds directly to minors. If you haven’t created a trust or made any legal arrangements for someone to manage the money, the court will appoint a conservator, a costly process, to handle the proceeds until the child reaches 18.

Instead, you can leave the money for the child’s benefit to a reliable adult; set up a trust to benefit the child and name the trust as the beneficiary of the policy; or name an adult custodian for the life insurance proceeds under the Uniform Transfers to Minor Act. Consult an estate attorney to decide the best course.

  1. Making a dependent ineligible for government benefits

Naming a lifelong dependent, such as a child with special needs, as beneficiary puts the loved one at risk for losing eligibility for government assistance. Anyone who receives a gift or inheritance of more than $2,000 is disqualified for Supplemental Security Income and Medicaid, under federal law.

Work with an attorney to set up a special needs trust, and name the trust as beneficiary. The trustee you appoint will manage the money for the dependent’s benefit.

  1. Assuming your will trumps the policy

A life insurance policy is a contract. Regardless of what your will says, the life insurance money will be paid to the beneficiary listed on the policy. That’s why it’s important to contact your insurer to change your beneficiary if needed.

  1. Forgetting to update

“Designating beneficiaries are not ‘set it and forget it’ events,” says Tara Reynolds, vice president at MassMutual. You should review your policy every three years and after major life events, such as marriage, having children or divorce. Change the beneficiaries when circumstances change.

Unfortunately, many people forget to do so.

“Many of my clients have been married twice” says Kathy Tatone, an estate planning attorney in Minneapolis. “It’s not uncommon to find the ex-spouse still listed as beneficiary on the life insurance policy” when reviewing a client’s assets.

  1. Staying mum

The most important thing is to tell someone so they know you have a life insurance policy, where it is and how to find it.

Open communication with beneficiaries now can save a family from chaos later – or even worse, never claiming the benefit.

  1. Giving money with no strings attached

Naming your young-adult children as beneficiaries without setting any conditions for how the money is dispersed can be a setup for financial failure. How many 18- or 21-year-olds can handle a huge influx of cash? One way is to set up a trust with specifics for how the money can be released and what it can be used for until the young adult reaches a certain age.

“It allows me as a parent to instill what I feel is valued in my absence,” Tatone says. “I don’t want to leave my children with millions of dollars when they’re 18 with unfettered access.”

  1. Naming only a primary beneficiary

“Most people just think they’re going to make their spouse beneficiary, but don’t take into account the spouse might predecease them,” Tatone says. “It’s conceivable that something would happen to you and your spouse together.”

Blatt says he even sees cases where people fail to name any beneficiaries. When there is no living beneficiary, the life insurance benefit typically goes into the estate and is subject to probate. That leads to two complications. One, heirs might face a long wait to get the money. Two, the life insurance proceeds, which normally would be protected from creditors, can now be open to creditors’ claims.

Advisers recommend naming secondary and final beneficiaries. If the primary beneficiary dies before you do, then the money passes to the secondary beneficiary. If the secondary beneficiary has passed away when you die, then the death benefit goes to the final beneficiary.

For more information contact Kathy Tatone, Your Family Guardian Law Firm, 612-604-5146, 4500 Park Glen Road, Suite 220, St. Louis Park, Minnesota 55416.

 

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