How to Avoid Beneficiary Mistakes in Life Insurance

Few decisions in life insurance matter more than who receives the benefit. The other details about how much, how long, and how it works are all factors in determining what is given to whom.

Choosing a beneficiary is a deeply personal decision. It is also a powerful one, as beneficiary designations in most cases override wills, trusts, and verbal wishes.

Selecting your beneficiary seems permanent. But many people don’t realize that deciding who benefits is not a set-it-and-forget-it step. It is something to look at over time to make sure your policy matches your life.

Why would a beneficiary need to be changed? Because life sometimes has a way of surprising us when we least expect it. That is why the number one way to avoid beneficiary mistakes is to have an annual review with a financial professional to make sure your policy and who it is for are still what you want.

What does that annual review look like? And what topics should you cover? Let’s dive in so you're prepared and confident before your review.

Gather information. Collect current policy and financial documents. This should help you understand how your beneficiaries are currently designated and whether your life insurance policy still complements your overall financial strategy.

What has changed? This is the most important question to ask yourself. Life experiences such as divorce, the death of the beneficiary, or children reaching maturity can make your life policy out of date. If there were a divorce, pay close attention to your state's divorce laws to determine whether the beneficiary status has changed.

Are the right people listed? Answer this based on the previous question. If nothing has changed, your beneficiary designations are likely still correct. If not, or if you simply want to change things based on personal preference, update your policy to include the correct people.

Do the percentages total 100 percent? It isn’t uncommon to have multiple beneficiaries. If this is the case, make sure the math works and that the total given matches the full amount. For example, Beneficiary A receiving 40 percent and Beneficiary B receiving 55 percent still leaves 5 percent with nowhere to go. A few missing percentages could be problematic.

Do you have contingent beneficiaries? If your primary beneficiary passes before you and no backup is listed, the benefit may go back to your estate, which can lead to delays and probate involvement. Having contingent, or backup, beneficiaries can help protect your financial strategy.

Have you named the wrong beneficiary? Insurance companies cannot distribute large sums directly to a minor. This can trigger court involvement and other issues. In some cases, a trust may provide more control and flexibility. Also, naming your estate as the beneficiary may lead to problems, such as creditors or other factors.

A real-world example. Suppose a client purchased a life insurance policy in his twenties and named his sister as the beneficiary. Years later, he was married with two children, but never thought to update his original life policy. This could cause issues if he were to pass unexpectedly, especially if his family assumed the life policy would benefit them.

We hope you find these questions helpful as you prepare for a more detailed conversation with us.  

P.S.
It is important to remember that several factors affect the cost and availability of life insurance, including age, health, and the type and amount of insurance purchased. Life insurance policies have expenses, including mortality and other charges. If a policy is surrendered prematurely, the policyholder may also pay surrender charges and face income tax implications. You should consider whether you are insurable before implementing a life insurance strategy. Any guarantees associated with a policy depend on the issuing insurance company's ability to continue making claim payments.