Elderly man signing a life insurance document

Common Mistakes Made on Life Insurance Beneficiary Designations

Over half of Americans have a life insurance policy, either as an individual or through their workplace. Investing in life insurance can give you peace of mind and a sense of security, but it’s important to pay close attention to details when designating beneficiaries. 

Your beneficiaries are the people who will receive the proceeds from your policy should you pass away. While it may seem straightforward to name a beneficiary, there are some common errors that could complicate your loved ones’ abilities to access funds upon your death. 

Here are the most common mistakes made on life insurance beneficiary designations and how to avoid them. 

Not Naming a Beneficiary

While most life insurance agencies require you to name at least one beneficiary when setting up a policy, not all do. If you forget to add a beneficiary, the funds may be passed to your estate. Heirs may then be forced to take the money in taxed segments, which can easily eat up a hefty portion of the funds. 

When starting a life insurance plan, make sure to add at least a primary beneficiary. It may also be a good idea to add a secondary beneficiary to cover situations where the primary is unavailable or declines the money.

Forgetting to Update Your Beneficiaries

As with a lot of estate planning documents, most people forget that life insurance policies should be regularly reviewed and updated. Making big life changes, such as getting divorced or having children, may influence who you want as a beneficiary on your policy. 

During big life events, it’s hard to remember to update your insurance information. It may be helpful to schedule an annual review of your policy to ensure everything is accurate. 

Choosing a Minor As Your Beneficiary

If you have children or grandchildren, it makes sense that you want them to be included in your life insurance plan. However, minors are unable to accept benefits directly from the insurance companies. The court may be able to assign a guardian to manage your children’s proceeds, but that can get complicated or may not align with your wishes. 

One solution is to create a trust and list the trust as the beneficiary on your life insurance policy. Your death benefit will be placed in the trust, which an adult trustee will handle until your children are able to manage the assets on their own. 

Not Considering Special Needs

If your loved one has special needs and relies on government benefits like Supplemental Security Income or Medicaid, adding them as a beneficiary on your life insurance policy could unintentionally complicate their lives. The funds may drastically increase their income and disqualify them from receiving government benefits.

That doesn’t mean you can’t set your loved one up for success, though. You can create a special needs trust (SNT) and have it listed as your beneficiary. Since SNT money is not typically counted as income, your loved one can receive the payments without losing government assistance. 

Using Vague Language

As with any legal document, it’s important to be as specific as possible. A lot of people think that statements like “my children” are clear enough, but even that can raise questions — are stepchildren included? Should grandchildren be secondary heirs if any of your children pass away? 

With vague language, it’s easy to accidentally disinherit some of your loved ones. Be as detailed as possible, or consider working with an attorney who can help you create a clear document. 

Work With an Estate Planning Attorney

A well-planned and executed life insurance policy can care for your loved ones no matter what happens. However, estate planning can be a complicated process, and it’s easy to overlook small details or make mistakes. 

Partnering with an experienced estate planning attorney is a great way to ensure your plan is precise, accurate, and in accordance with your wishes. For top-notch estate planning services in Orange County, CA, contact OC Wills and Trusts today.

Brian Chew, the managing partner of OC Wills & Trust Attorneys, has extensive experience in the areas of estate planning, asset protection planning, business succession planning, long-term care planning, and veterans’ benefits. By devoting his practice to estate planning matters, he has founded a firm that strives to provide exceptional service to their clients by working closely with individuals and their families to create comprehensive and customized estate plans. For the past twenty five years, Brian has served thousands of clients in the matters of estate planning, wills and trusts. If you have any questions about this article, you can reach Brian Chew here.