Life insurance is important piece of your estate plan.Naming a beneficiary for your life insurance policy is a generous and caring act. When you make the decision to meet with an estate planning attorney, it is crucial to have your beneficiary designations for your policies reviewed.
That’s why, as a leading estate planning law firm in Hollywood, we take our time to carefully educate our clients on best practices for naming beneficiaries.
Even though your intentions are good and you simply want the best for the ones you love, mistakes are easy to make if you are not educated on the matter. If you aren’t choosing beneficiaries appropriately, you could end up having an estate planning nightmare!
Here are nine common errors to avoid when assigning a life insurance beneficiary:
1. Naming a person with special needs
Not only might this person be unable to handle money on their own, if a special needs person receives a lump sum of money in the form of an inherited life insurance policy, they are at risk for losing eligibility for government assistance.
2. Naming a minor child
Even if this is your only child, you do not want to leave an entire life insurance policy to someone who is underage – life insurance companies will not pay out your policy to a minor child. The best way to leave money for anyone underage is to set up a trust account, and have it managed by an adult that has a relationship with your child.
3. Using Your Will to designate who will benefit from your life insurance
Your will is one document, and your life insurance policy is another. Your will cannot override your life insurance policy. Despite what your will says, the life insurance money will be paid to the beneficiary listed on the policy.
4. Forgetting tax implications
For the most part, life insurance proceeds are income tax-free, however, they are subject to estate tax. It is important to consult a professional, such as Grimaldi Law Firm, with any questions related to estate taxes and life insurance policies.
5. Forgetting to update beneficiaries as life changes
Unfortunately, many people assign life insurance beneficiaries at one point in their lives and forget to update this choice as life changes. For example, in the case of divorce, would you really want your ex-spouse inheriting your policy? Don’t forget to review your policy as change occurs in your life.
6. Keeping secrets
If you’ve taken out a life insurance policy and named a beneficiary, don’t keep it a secret! It is imperative that your beneficiary or trusted family members are made aware of your policy, where it is, and how to find it, should something happen to you.
7. Overlooking the details
The deal is in the details, and you’ll want to be as specific as possible when naming your life insurance beneficiaries. For example, naming your “child” as a beneficiary is not a good choice. Naming your “child” Michael is a much better way to ensure there will be no mistakes made in the designation of your monies.
8. Eliminating strings
When it comes to life insurance policies, it is always good to have strings attached. For example, leaving money to a young adult child without rules is a guaranteed way to have it mishandled. How about someone with substance abuse issues or mental illness? Using a trust, you are able to assign guidelines and boundaries to how and when money is given to your beneficiary, to ensure it will not be spent frivolously or carelessly.
9. Naming only a primary beneficiary
We know that for many people, there may only be one true person in your life worthy of your policy. But what happens if they predecease you? It is always good to have a backup plan in any situation, and especially in the situation of naming a life insurance beneficiary.
For more information on how to get your financial affairs in order, Grimaldi Law Firm is happy to answer your questions in a Family Planning Session.
At Grimaldi Law Firm, your future is our present.
We can be reached at (954) 491-8707
Special Note: The information on this blog is of a general nature and is not intended to answer any individual’s legal questions. Do not rely on information presented herein to address your individual legal concerns. If you have a legal question about your individual facts and circumstances, you should consult an experienced real estate attorney. Your receipt of information from this website or blog does not create an attorney-client relationship and the legal privileges inherent therein.