It is extremely important to get the details of your life insurance policy correct. While this may seem like a “no-brainer,” many well-meaning policyholders make mistakes that end up hurting the people they love. Read on to learn about the 5 most common errors people make when naming life insurance beneficiaries and how to “undo” a mistake if you’ve made one.
- Naming minor children as beneficiaries
If you leave the proceeds of your life insurance directly to a minor child, a judge will have to step in and decide who will control this money until your child turns 18. And, it may not be a person you would choose. For example, it could be that your life insurance proceeds are left to your child and then controlled by your ex-spouse. This is especially troubling for people who have ex-spouses who are financially unstable. Also, it’s important to know that your child could inherit a large sum of money at 18 years old with zero protections or safeguards around their inheritance. Very few teens at this age have the financial savvy to properly manage large sums of money. If you want to be sure that the money you leave behind for your kids is protected and not fully distributed to him or her until a certain age or life milestone (like the purchase of a home), talk to an estate planning attorney about putting the funds in a trust instead.
- Naming a person with special needs as beneficiary
If you name a child with special needs or another person who is eligible for government benefits as a beneficiary, you could inadvertently disqualify them from receiving key benefits for their healthcare or daily care. It is much safer to leave funds in a Special Needs Trust so that the child can benefit from the proceeds in the trust without jeopardizing his or her eligibility for government programs.
- Not thinking through tax consequences
Life insurance proceeds are usually income tax-free, but they are subject to the estate tax. Talk to a Florida estate planning attorney about these issues before naming your beneficiary. He or she can help you identify any traps that you never saw coming.
- Failing to review and update your beneficiaries
You would be shocked at the number of ex-spouses who are enriched by a life insurance benefit because their ex forgot to update the policy’s beneficiary form! Be sure to review your beneficiary designations every time you have a significant life change.
- Naming only one beneficiary
If you name only one beneficiary and that beneficiary dies before, or at the same time as you, the proceeds of the insurance would end up being passed to your heirs according to state law and will be administered by a judge who doesn’t know you or your wishes. To prevent this from happening, name secondary and tertiary beneficiaries.
If you would like to learn more about protecting the inheritance you wish to leave for your family, call our Florida estate and elder law office at (813) 438-8503 to schedule a consultation. Our Brandon estate and elder law attorneys can help ensure that the inheritance you leave behind goes directly to the people that you choose without headaches or complications.