Naming the beneficiary of a life insurance policy may seem easy, but common mistakes and pitfalls can occur. One mistake in naming the beneficiary could be heartbreaking and costly. To ensure your final wishes are carried out, consider these six points.
Dependent adult children
Leaving life insurance proceeds directly to a dependent child, such as one with special needs, could cause risk in losing government benefits. A large sum of money may disqualify the child from Medicaid services and Social Security income. It is important to plan in advance. A better option may be to work with an attorney who can properly draft a special needs trust to which life benefits are payable.
Community property states
Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin have special rules. In these states, if you named someone as beneficiary besides your spouse, you will need your spouse to sign a waiver. This is necessary if you are using commingled money to pay life insurance premiums. But if you pay premiums with money from before the marriage or from a gift or inheritance, you may designate the proceeds to whomever (with an insurable interest still required at issue).
Periodic reviews and updates
When important life changes happen—or at least every few years—it’s important to review and update beneficiaries. A death in the family, a divorce or remarriage are just a couple examples of reasons to revisit beneficiary designations to ensure your wishes and desires are met.
Per stirpes or per capita
You don’t need to know Latin, but you should understand the differences between these two terms. Per capita means “by the head.” Per stirpes means “by the stock (branch of family).” Here’s the practical difference. Suppose two children, John and Mary, are heirs of their parents. John has two children, Aaron and Brenda. If John and Mary or their surviving children are made their parents’ beneficiaries per stirpes and John dies before his parents, his surviving children, Aaron and Brenda, will receive his half of the proceeds. His sister Mary will receive the other half. Now, if John and Mary or their surviving children are made the beneficiaries per capita and John dies before his parents, Aaron and Brenda each receive one-third of the proceeds. His sister Mary will receive the remaining one-third.
Estate vs. direct beneficiary or family trust
One of the best benefits unique to life insurance is to allow proceeds to flow promptly and income-tax-free to living beneficiaries. Naming an estate as the beneficiary can create delays, however, along with additional death-tax burdens and fees. In some cases, the deceased’s final medical bills may consume the entire estate. As an alternative, leaving insurance proceeds to a direct beneficiary, like an adult child or spouse, may be a better choice. If you’ve planned ahead, naming the family trust could be suitable as well. Just remember to include the full name of the trust, along with the date it was established or last modified.
Provide as much contact information as possible for any named beneficiary. This information will help locate named beneficiaries at the time of the claim. Information should include each beneficiary’s relationship to the policyholder, address, telephone number, birth date and Social Security number.