Life insurance can be an important part of an estate planning program. But it is also easy to make mistakes when naming beneficiaries that can create problems for the rest of the plan. And when these mistakes happen, the problems usually become those of the ones left behind after your death.
One of the most common problems is the failure to update beneficiaries as life events happen – marriage, divorce, remarriage, births, deaths, etc. Not paying attention to these events may result in your ex-spouse getting more insurance proceeds than your current spouse gets through your estate – probably not what you intended.
But other issues may arise as well. If you are not married, you may think that making your child your insurance beneficiary is the best route. But if your child is still a minor when you die, he or she cannot directly receive the money. It must be managed by an adult. And if you haven’t made that designation, a guardian will be appointed by the court to handle the funds with two results: (1) the court process can be costly and (2) someone you might not have picked will be controlling the money.
Similarly, if the beneficiary you name is receiving some form of government benefits when you die, the proceeds from your insurance could actually cause the beneficiary to lose some or all of those benefits. A disabled child or a parent or older sibling receiving Medicaid or Social Security could be disqualified when his or her net worth increases. While it is certainly not a bad idea to leave money to supplement the needs of these loved ones, consider setting up a trust or other means of managing the proceeds without it affecting the other benefits of the beneficiary.
The problem with naming beneficiaries is not so much “who” as “how” – name the person that you think will benefit most from the proceeds but make sure that the proceeds are distributed in a way that helps and not harms them. An estate planning attorney will be able to help you choose the best routes to benefit your loved ones.