People purchase life insurance with the goal of providing for their loved ones in the event of their passing.  It follows then that naming beneficiaries of a life insurance policy is often an automatic action for people, depending on their life circumstance.  Married people typically name their spouses with their children as the contingent beneficiaries.  Unmarried people who have children usually name their children as the beneficiaries.
However, care must be taken to ensure that the right beneficiaries are named to accomplish certain goals.  The policy holder must be aware of the consequences of making certain beneficiary designations.  Here are 5 mistakes people make when designating the beneficiary of their life insurance policy:


1. Forgetting to update beneficiaries

Our lives are constantly changing.  As a result, the beneficiary named when a person purchased a policy might not be the appropriate person at a later date.  It is imperative that a life insurance policy holder regularly check on his or her beneficiary designations to ensure that the right person is still listed as the beneficiary.  Also, the policy holder should be sure to review his or her beneficiary designations upon major life events including births, deaths and divorces.  Leaving an ex-spouse as the beneficiary on a life insurance policy is more common than some might think!

2. Failing to name a contingent beneficiary

A contingent beneficiary is the second in life to receive the life insurance proceeds.  However, many life insurance policy holders only name one beneficiary, assuming that beneficiary will outlive the policy holder.  However, if the beneficiary predeceases the policy holder and the policy holder fails to name a new beneficiary, the life insurance proceeds could end up being subject to probate.  This is not only costly and time consuming, but may result in unintended consequences like having the proceeds passed to a minor child, a special needs family member who receives government benefits, or to a loved one who is incapable of managing their own money.  Instead, the best method is for every policy holder to name both a primary and contingent beneficiary.  That way if the primary beneficiary predeceases the policy holder, the contingent beneficiary will receive the life insurance proceeds, instead of ending up in a probate court.

3. Designating a minor child as a beneficiary

People often purchase life insurance as a way to provide for their children if something were to happen to them.  However, people often make the mistake of naming their minor children as the beneficiary of the policy.  If a minor child inherits assets, a conservator must be appointed to manage the child’s assets.  This means court time, attorneys’ fees and regular accountings that must be provided to the court.  In addition, the child will able to receive the remainder of the life insurance proceeds outright and in one lump sum upon turning age 18.  This may end up with the beneficiary using the life insurance proceeds in a way that wasn’t intended by their parents.  The better solution is to leave the proceeds in a trust for the benefit of the minor child.  If the assets are left in trust, the policy holder can control how and when the assets are distributed to the beneficiary, without the need for court supervision.

4. Naming a special needs beneficiary who receives government benefits

The ability of a special needs individual to receive government benefits is often conditioned on the individual not having sufficient funds to provide for their own needs.  If a life insurance policy holder names a special needs individual as a beneficiary, it could cause the beneficiary to lose his or her government benefits.  If the policy owner wants to provide for a special needs individual, the best option is to create a special needs trust and name the special needs individual as the beneficiary of the trust.  This way, the proceeds in the trust can be used to supplement the beneficiary’s government benefits without eliminating them.  This also eliminates the potential issues relating to gifting and family conflict when a family member leaves money to another family member to be used for the special needs individual.

5. Thinking that a will or trust controls the distribution of life insurance proceeds

Many people create wills and revocable living trusts as part of their estate plan.  When they do this, some believe that the will or trust will control the distribution of life insurance proceeds.  This is not the case.  A life insurance policy is a contract between the policy holder and the life insurance company.  When the policy holder enters into the life insurance contract with the life insurance company, part of that contract includes the policy holder naming a beneficiary of the policy.  The life insurance company is required to pay the insurance proceeds to the person named on the life insurance contract, without any regard to any beneficiary designations in a will or trust.