You knew getting life insurance was the next step for securing your family's future. So you did the right thing, looked into a few quotes, signed up for a policy that seemed like the right fit, and declared your spouse as a beneficiary. Then, after a job well done, filed the paperwork away never to be thought of again.
Not so fast. Failing to pay attention to your policies and beneficiaries can create detrimental consequences for your family. Long-term neglect of an insurance policy puts your family at risk for a number of potential uncertainties, costs, and stress.
This article looks into 12 costly mistakes people make with their life insurance beneficiary designations. If it’s been a while since you reviewed your policy, it’s time to make an appointment with Ken. Continue reading to learn more.
1. Forgetting to keep insurance policy and beneficiaries up-to-date
Let’s start by getting the obvious out of the way. As a rule, estate plans should be reviewed at least once per year. If there is a death, divorce, or other major change to the structure of your family, your estate plan needs to be updated immediately.
Keep in mind, if you need to change a primary or contingent beneficiary, there will be paperwork involved that requires your signature. Depending on how busy the life insurance company is, once we send them the paperwork, it may take some time for them to review the paperwork and implement the change - all to say that it’s not as simple as making a quick phone call.
2. Making your estate your life insurance beneficiary
When signing up for life insurance, some people may have a difficult time deciding who to name as their beneficiary. In this case, they may decide to default everything to their estate.
Generally, this isn’t recommended. Why? While each province has their own set of rules, when a death benefit is left to your estate, what could have been a seamless, tax-free life insurance payout becomes eligible for probate, creditor access, and potential taxes. Further, typically, when an estate goes through probate, the beneficiaries and amount paid to them can become public knowledge.
An essential part of estate planning is ensuring that your plan is properly implemented and funded. Has all of the paperwork been properly titled, signed, and drafted? Are all of your beneficiary designations current? Unsure? Schedule a meeting with Ken today.
3. Benefiting someone without meaning to
Let's face it, sometimes, a “happily ever after” doesn’t happen. Perhaps someone passed away or there was a falling out, and now some of the people you initially wanted to include as a beneficiary no longer qualify.
A few examples of beneficiaries you may wish to change include:
A former spouse/ in-law
A spouse or other family members who passed away
Former business partners
Need to update your policy? Call today.
4. Designating specific dollar amounts from policies for beneficiaries
If it’s been a few years since you’ve last looked at your policy designations, this point is especially important.
Let’s say you purchased a policy with a $500,000 death benefit. At one time, the approach was to designate a specific dollar amount for each beneficiary ($500,000 split between 5 beneficiaries for a payout of $100,000 each).
These days, policy holders are encouraged to designate a specific percentage of the benefit for each beneficiary (ie: 20% to each beneficiary). Doing this can help your family avoid unnecessary delays from any dividends or loans.
💡 Further reading: 11 Estate Planning Myths That Hold You Back
5. Not selecting contingent beneficiaries
As you may have guessed, buying a life insurance policy is not a quick and easy process. There’s a good deal of paperwork involved, questions to answer, and decisions to make. Not to fret, Ken will take you through everything with you before you sign anything.
More often than not, people choose their spouse as their primary beneficiary. From time to time, however, new life insurance purchasers can have trouble when it comes to choosing a contingent or back-up beneficiary.
This can happen for a number of reasons. It may be simple for someone to name their spouse as the primary beneficiary, but if they don’t have children, siblings, or parents, a brainstorming session may be needed to choose a contingent.
A back-up plan is essential because if your primary beneficiary were to pass away before you or at the same time as you, without a contingent beneficiary, your insurance proceeds could default to your estate and be subject to taxes.
If a specific person doesn’t come to mind when naming secondary or tertiary beneficiaries, consider choosing a charity or meaningful organization. Need help choosing an appropriate beneficiary? Speaking with an unbiased third-party can be helpful - make an appointment today.
6. Unintentionally excluding a child or grandchild
Families grow and change all the time. But if your beneficiary designations don’t change alongside your family, some of your loved ones may be excluded from their share of your life insurance benefit.
Meet with Ken to review your policy so you can touch base with your original plan and ensure it matches your current circumstances. Call today.
7. Naming a minor child as a beneficiary or not setting up a proper trustee
Traditionally, parents purchase life insurance as a way to support their family in the event that one or both of them pass away unexpectedly. Naming a minor child as a beneficiary without a trustee, however, is typically something that most policies won't allow and best to be avoided.
Life insurance companies are unable to pay life benefits directly to a minor which is why a proper and complete estate plan includes appointing a trustee for minor children to ensure that the proceeds can be distributed at the right time rather than getting lost in the courts.
In theory, a trustee will distribute the death benefit once the child is old enough to receive the funds. Depending on the amount, you may decide to plan several payments to take place over a number of years. In addition, some children may require special care if they were to be left on their own. This is an important consideration as inadequate arrangements or funding could result in leaving your most vulnerable beneficiary at risk.
If you purchase life insurance for the purpose of benefiting your minor children but fail to create a trust or make legal arrangements for a trustee/ guardian to manage the money on their behalf, the court will appoint one for you. Unfortunately, this process can take time and who they appoint is something that you will not have any control over. Having the proper trustee in place ahead of time can help minimize complications involved when it comes to distributing funds to a minor.
8. Not knowing your settlement options
For certain family members or anyone you’d like to support by declaring them as a beneficiary, it isn’t always the best or safest idea for them to be handed a large lump sum of cash. But that doesn’t mean that you can’t or shouldn’t provide for them.
Did you know it’s possible to control how and when your money is paid out?
By planning ahead of time, you can protect your beneficiaries by arranging a payout schedule in advance. If needed, Ken can help take care of this for all your policies and does not charge a fee for this service - schedule your appointment today.
9. Forgetting to name a beneficiary for any disability insurance policies
Often overlooked but not to be forgotten about are certain policies, like disability insurance, that can have death benefit payouts. If it’s been some time since you’ve gone over your policy paperwork, double check that a beneficiary has, in fact, been designated and that their information is still current. Not naming a beneficiary, or having the wrong/ misspelled name, can result in a major and untimely situation.
Essentially, if you have the opportunity to name a beneficiary, ensure that you do and that their information is correct.
10. Not knowing that you can support a meaningful cause
As a part of the legacy you leave behind, there may be an opportunity to support a charitable cause by designating them as a beneficiary on a policy. In addition to the philanthropic aspect, the tax credit can also be a helpful asset for your estate when the time comes.
Interested in learning more? Schedule a free consultation with Ken.
11. Unintentional conflict between your policy designations and will
When settling an estate, what is the first thing an executor looks for? The will. What happens when the will dictates one set of directions but the life policy designations suggest otherwise?
This is a common issue that comes up for people who take the DIY route when it comes to creating their will and estate plan. While there’s a number of things you may prefer to DIY. Writing your will and solidifying your estate plan on your own is not one we’d recommend.
It’s no surprise that when someone passes away, there is a considerable amount of paperwork involved and important decisions to make. It’s when the paperwork contradicts itself, that everything gets complicated.
Avoid confusion, delays, and surprise expenses by ensuring your will and policy designations are on the same page, so to speak. Need help? Meeting with Ken can help tie up any loose ends. Click here to make an appointment.
12. Being too general with details
In addition to making sure your policies align with the directions in your will, it’s important to be specific about your intentions and anything that could be left up to interpretation.
Ken can help you organize a document with all of your beneficiary designations as well as their value. A list of full names, Social Insurance Numbers, and current contact information will become a major asset for your executor and family during what may be one of their most grievous times. Furthermore, if you are leaving money to a charitable organization, be sure to list the organization’s name, address, and tax ID number.
💡 Further reading: Executor Duties & Responsibilities
A simple way to help avoid beneficiary mistakes
One of the best things you can do with your insurance policy(ies) is review them annually with Ken. Doing this gives you the freedom to go over your choices about your insurance proceeds and update them if needed.
If you know there are changes to be made, it’s important to take care of them while you can. If we’ve learned anything over the past couple of years, it’s that life can be very unpredictable if not chaotic.
Need to review your own policies or have questions about your life insurance options? Click here to make an appointment with Ken or give us a call today (250-861-7777).