5 Pitfalls Encountered When Naming Insurance Beneficiaries
Celebrity couple Mila Kunis and Ashton Kutcher added a little girl to their family on September 30th. The baby’s healthy, and the parents couldn’t be happier. Being as famous as they are, co-starring on Family Guy and Two and a Half Men, respectively, they’ve certainly considered life insurance before, but being unmarried, they may not expect how the policy would pay out.
If you have life insurance or are planning on looking into a policy soon, there are a few important things to know about naming beneficiaries. If you’re married, your spouse is the beneficiary and your children are contingent beneficiaries. If you’re not married, the kids are the primary beneficiaries. At first, it doesn’t seem complicated, but there’s more to it, so before you start getting life insurance quotes, read up on these 5 tips to avoid common mistakes made when naming a beneficiary.
1. Update the Beneficiary Designation
When you first set your policy up, naming your beneficiary is part of the process, but as time goes on, things change. The person you originally named may not still be the appropriate beneficiary, so it’s very important to assess the circumstances of your life regularly and change the beneficiary immediately if you decide a change should be made. Consider reevaluating your beneficiary assignment every few years or after a major life event such as a birth, death, marriage, or divorce.
2. Name a Contingent Beneficiary
Naming a primary beneficiary is important, but it’s not always guaranteed that the beneficiary will outlive the policy holder. If you name a contingent beneficiary or reassign the primary beneficiary, the money will go to them, but if you neglect to keep up with that, the policy may be subject to probate upon your death. The process associated with this is expensive and time consuming, involving attorneys and the fees associated with them.
3. Don’t Name a Minor as the Primary Beneficiary
Often, life insurance is purchased for the sole purpose of protecting the children of the policy holder. It makes sense to pass your assets down to your children; naming a minor as your beneficiary is always a mistake. Upon the policy holder’s death, the money will often be subject to, again, probate. Instead of the child receiving benefits, the assets of the deceased will be put under legal guardianship until they reach the age of 18. At that point, a large flood of currency might not be used responsibly. It’s better to set up a trust for the child.
4. Don’t Name a Beneficiary Who Receives Needs-Based Government Benefits
If you pass down your assets to someone receiving government aid, they may no longer qualify for those benefits. This situation has many parallels with naming a minor as your primary beneficiary, and the same solution applies: set up a trust for the would-be beneficiary. This will also eliminate tension and jealousy that could be associated with the inheritance.
5. Don’t Assume a Trust Will Take Care of Designation
If you create a living trust, be sure to cover your bases and designate the distribution of insurance proceeds. To make sure that the policy and the trust work together, you must name the trust as the beneficiary of your life insurance policy. From there, it’ll be handled by the trust.
Have you taken out a life insurance policy or started a trust? Do you have any guidance for those still preparing? Share your advice in the comments section below!