5 Beneficiary Mistakes to AvoidAfter 35+ years of serving clients in the life insurance industry, I’ve seen many clients navigate the task of beneficiary assignment. On that same note, “Chris, is life insurance part of an estate?” rings through my office plenty of times during one week. And for good reason. Life insurance and naming a beneficiary can seem confusing. In this post, let’s look at some life insurance beneficiary mistakes that people make, so you can avoid these pitfalls and make more educated decisions.

1. Forgetting to choose a beneficiary or selecting a minor

If you’re like most people, life insurance isn’t nearly as fun a task as planning a vacation or even watching Saturday morning cartoons. However, it’s a necessary job when you have others who are financially dependent on you.

Strangely enough, the most common mistake some people make regarding life insurance is forgetting to choose a feasible beneficiary. Sure, your spouse or your children are typically go-to candidates. But what if they pass away alongside you? Or if your children are minors at the time of your death? This situation is where a primary vs. secondary beneficiary plays out, of course.

However, when no living beneficiary exists, the life insurance payout will go to your estate — which creates mounds of problems in itself. Plus, life insurance carriers don’t issue payouts to minors. Your child would need a guardian to receive any of your helpful cash.

2. Missing per stirpes or per capita

Many of my clients choose not to name their spouse as a beneficiary. Instead, they name their grown children but often forget the “branches of the family tree.”

For example, one way to divide a life insurance payout is per capita or by “head,” when the payout amount is split equally among all beneficiaries (usually the children). The second way is per stirpes or by “branches.” If the child named as a beneficiary passes before the policyholder, the payout is divided out to the grandchildren (or branches of the family tree).

Choosing multiple beneficiaries is relatively standard practice. However, this approach can create problems when only one beneficiary (usually a grown child) passes on before the policyholder. Do you want their lot divided among the remaining beneficiaries? Or would you instead their share be divided among the beneficiary’s children? It’s no surprise how this mistake can cause rifts in families.

3. Life insurance paying to an estate

Let’s go back to the initial question, “Is life insurance part of an estate?” to make sense of this point. It’s true; some people name their estate as the life insurance beneficiary. But this approach typically causes more problems than not.

For one, a life insurance payout to an estate makes that money subject to probate. So, your heirs aren’t likely going to have access to it until probate is completed. Once probate creditors have access to the life insurance payout, they get first dibs to it, paying off any remaining debt owed them (i.e., credit cards, personal loans, etc.).

The answer to the question, “Is life insurance part of an estate?” is that it depends. It doesn’t have to be if you choose a primary, secondary, and final beneficiary. Choosing contingent beneficiaries will prevent life insurance carriers from paying to your estate — and opening a can of worms in the meantime.

4. Interference from government assistance

There’s a good chance that Big Brother rarely surprises you with strict or outrageous regulations any longer. Once you’ve been here on this planet long enough, you might feel bomb-proof, after all. But did you know that your named beneficiary might have issues receiving a life insurance payout because of government assistance?

Consider that most government assistance programs are based on a recipient’s financial circumstances. Changing economic circumstances could deem the recipient ineligible.

In other words, receiving a significant chunk of change from an insurance payout could be what disqualifies your beneficiary from future government assistance. Or, the government assistance program could confiscate the life insurance payout as reimbursement for benefits paid.

These dynamics are tricky to navigate. Talking with a seasoned insurance professional or an estate attorney is your best bet.

5. Overlooking taxes

Most of the time, the policyholder and the insured are the same person. For example, let’s say a father purchases a 30-year term insurance policy. He names his son as the primary beneficiary, his daughter as the secondary beneficiary, and his favorite charity as the final beneficiary. This arrangement is relatively typical in the insurance world.

However, sometimes the policyholder and the insured aren’t the same person. Consider a man purchasing a 20-year term life insurance policy for his mother, naming his daughter as the beneficiary. Our government views the policyholder’s actions as gift-giving for his child, and therefore, he might be subject to a gift tax.

Many people think of these regulations as tax traps, and maybe they are. More than anything, though, they’re hurdles to navigate. Working with an insurance or financial professional will help you find ways to avoid any bumps in the road.

Take the Next Step

It’s tough knowing how to protect your family after you’re gone, especially with such a vast amount of information out there. But we can help!

To support you as you safeguard your financial security, I’ve created an up-to-date guide for parents who need life insurance here. My guide can help you with your long term life insurance goals, especially with a family to nurture at home.

Here at CB Acker Associates, we want to help you take care of your family. If you’re ready to find a policy that fits your needs and your budget, we can help!

With access to all the top-rated life insurance companies, we work extra hard to get you the best life insurance rates possible. You can even compare rates and benefits from over 40 providers with no obligation to buy here. Plus, it’s fast—under 60 seconds kind of fast.

Please, give us a call today at 650-969-5844 or email [email protected].