Naming who should get the life insurance money after you die sounds simple, but designating beneficiaries can get tricky.
Mistakes are common, financial advisers say — and they can be heartbreaking and expensive.
When mistakes are made “you’re not creating problems for you,” says Keith Friedman, principal of FBO Strategies, an estate planning and insurance firm in Stamford, Conn. “You’re creating problems for the people you leave behind.”
Here are seven life insurance beneficiary mistakes to avoid.
Naming a minor child
Life insurance companies won’t pay the proceeds directly to minors. If you haven’t created a trust or made any legal arrangements for someone to manage the money, the court will appoint a guardian to handle the proceeds until the child reaches 18 or 21, depending on the state, which is a costly process.
Instead, you can leave the money for the child’s benefit to a reliable adult; set up a trust to benefit the child and name the trust as the beneficiary of the policy; or name an adult custodian for the life insurance proceeds under the Uniform Transfers to Minor Act.
Overlooking your spouse in a community-property state
Generally you can name anyone with whom you have a relationship as beneficiary, even a secret lover.
“Life insurance is not a judge of someone’s morals,” Friedman says.
Assuming your will trumps the policy
A life insurance policy is a contract. Regardless of what your will says, the life insurance money will be paid to the beneficiary listed on the policy. That’s why it’s important to contact your insurer to change your beneficiary if needed.
Forgetting to update
“Designating beneficiaries are not ‘set it and forget it’ events,” says Tara Reynolds, vice president at MassMutual. You should review your policy every three years and after major life events, such as marriage, having children or divorce. Change the beneficiaries when circumstances change.
Unfortunately, many people forget to do so.
Neglecting details
Do you want to leave life insurance money to your kids and grandkids, and you want it divided evenly?
There are two ways of distributing the money — per stirpes and per capita. You can specify either method on the life insurance policy, and both are acceptable options when naming beneficiaries, says Ed Graves, a professor of insurance for The American College in Bryn Mawr, Pa. “But the possible outcomes can be drastically different from one approach to the other.”
Per stirpes means the proceeds are divided by branch of the family, and per capita means they are divided by head.
Be specific when you name beneficiaries. Instead of “my children,” list their names, social security numbers and addresses, Graves added.
Otherwise, “the insurance company has to launch a search and that can take a lot of time,” Graves said.
Staying mum
“The most important thing is to tell someone so they know you have a life insurance policy, where it is and how to find it,” says Joshua Hazelwood, vice president at MassMutual.
Giving money with no strings attached
Naming your young-adult children as beneficiaries without setting any conditions for how the money is dispersed can be a setup for financial failure. How many 18- or 21-year-olds can handle a huge influx of cash? One way is to set up a trust with specifics for how the money can be released and what it can be used for until the young adult reaches a certain age.
• Tips by insure.com.