Who Shouldn’t Be Your Life Insurance Beneficiary? 7 Mistakes to Avoid
May 11, 2023
3 min read
Selecting your beneficiary may come to some as a no-brainer, but more often than not, there are things that may be overlooked when choosing someone. Take a look at what are some common mistakes made and what you can do to avoid them.
Common Life Insurance Beneficiary Mistakes
If you’re looking into getting life insurance, you should also think of who will be the beneficiary receiving the death benefit from your policy. Be sure to keep in mind a few life insurance beneficiary rules to know that can help avoid mistakes before putting someone on a life insurance policy.
Failing to Name a Beneficiary
It’s not wise to get a life insurance policy and not choose a beneficiary. Without a death beneficiary, your death benefit will generally be paid out to your estate which can then lead to probate making it difficult on your beneficiaries to sort everything out. It can also be subject to claims of your probate creditors lengthening the process.
How to Avoid It: Name a primary, secondary and a final beneficiary and make sure to keep this info up to date.
Designating a Minor Child
As a parent, designating your children as your beneficiary may be your first choice. Before you do this, know that if they are minors it will disqualify them from receiving a life insurance payout and complicate the payout process. A guardian may be appointed to handle the proceeds until the minor becomes of legal age. However, this option can be time-consuming and costly.
How to Avoid It: Consider creating a trust that names the minor as the beneficiary. The trust will pay out the proceeds that you set in the document. This will allow the minors to have access to the funds when the time is right.
Not Planning for a Beneficiary’s Death
When you’re setting up your beneficiary, you’re probably not thinking about what will happen if they die before you. If you don’t assign multiple beneficiaries, you run into the issue of having your death benefit going to your estate, causing delays and extra expenses you and your beneficiaries may not have accounted for.
How to Avoid It: To avoid this, you can look into other methods of distributing your assets. With per capita, your payout will be distributed evenly among the multiple beneficiaries listed. If there is only one beneficiary, you can select to go with a per stirpes life insurance beneficiary option allowing your beneficiary’s children to step in and have the payout distributed evenly to them all.
Choosing an Untrustworthy Beneficiary
It may be possible that the beneficiary you choose has had some history of financial troubles or you fear they will mismanage the funds. Sometimes family members may be the only people you feel should receive the death benefit because you want to take care of them after you’re gone. Or your beneficiary may be an adult child that is still learning how to be independent. Whatever your case is, there are ways to make sure they are taken care of.
How to Avoid It: You can consider naming a trustee to help manage the funds, so your beneficiary is able to receive the money. The trustee you assign will hold the legal title of the assets and help distribute the funds appropriately.
Naming a Specific Purpose
When selecting who will be your beneficiary, you want to provide as many details and specifics as possible. Let’s say when you first sign up for the policy you are wanting the death benefit to be paid out to the mortgage to financially support your family, but your family finishes paying off the mortgage sooner than expected. There is a risk when listing someone’s mortgage or naming a child’s education expenses as a beneficiary if the funds are no longer needed for that purpose at the time of payout.
How to Avoid It: Creating a will is a great way to express where your assets should be distributed to and how. Even if you have provided specific notes in your policy, updating your will regularly can help prevent any issues that may arise at the time of payout. You can specify exactly what you want each beneficiary to receive and all other important information your family members or beneficiaries should know with a letter or wishes and records. This letter of wishes and records is not legally binding, so it is best to include it with your will.
Designating a Spouse by Default
If you have a spouse, it is more than likely they will be your primary beneficiary when it comes to your life insurance policy. This is generally the first option for many, but it’s important to think that divorce or death may complicate the payout.
How to Avoid It: Be sure to regularly review and update your list of beneficiaries, especially after major life events like a divorce.
Not Communicating with Designated Beneficiaries
Communicating with the people you list as your beneficiaries should also be done so after you select them. On occasion, some people don’t want to be listed as beneficiaries and this can cause disputes after death.
How to Avoid It: Be sure to have an open and honest conversation about your financials and go through the details of your policy. Make sure everyone is on the same page to avoid confusion later on. Sit down and talk with the people you have chosen to list as a beneficiary and allow them to be aware of the expectations you have.
We’ve Got Your Back!
We know that choosing a beneficiary can seem like a lot, but your local Farm Bureau agent can help walk you through the process to make sure you have the information necessary before making a decision.