Help clients avoid these mistakes when naming a life insurance policy beneficiary:
- Naming a minor as a beneficiary
- Naming a relative to receive the proceeds on behalf of a minor
- Naming an estate as primary beneficiary
- Naming only a primary beneficiary
- Neglecting to update beneficiary designations
Editor’s note: This post was originally published on 12/29/16 and has been updated for accuracy and comprehension.
Could you be vulnerable when helping your client with their life insurance beneficiary designation – and risk your relationship with the client?
Unfortunately, the answer is yes – if you’re the agent of record and took part in advising your client on the purchase of life insurance.
So, as you undertake this responsibility, you need to be keenly aware of some of the obstacles and problems that can be encountered with the beneficiary designation on a life insurance policy.
Usually, the life insurance carrier will double check the beneficiary designation on the policy (but not always).
However, you don’t want to be in the position of having to go back to your client and tell them that your initial advice was wrong.
In order to avoid that situation, here are five of the most common mistakes made when considering beneficiary designations.
1. Naming a minor as a beneficiary
This is probably the most common mistake made by young parents wanting to leave money to their children. At first blush, it sounds like a good idea but it can have significant consequences.
The fact is that insurers won’t pay life insurance benefits directly to minors, because minors can’t own property in the United States.
If you name a minor child as the beneficiary of the life insurance policy, they can’t enter into the contractual arrangement necessary for them to receive the money.
A better idea is for the parents to set up a trust for the children that wouldn’t be able to access until they were a little older and presumably more responsible.
In this scenario, the beneficiary of the life insurance policy is the trust. Consult with a legal professional for the proper advice for doing this.
2. Naming a relative to receive the proceeds on behalf of a minor
For those that understand that a minor cannot enter into a contractual agreement, their immediate reaction is to leave it to some other individual, usually a relative, “for the benefit of the children.”
This sounds like it will take care of the problem. However, even though the client is sure that “Aunt Jane” would only have the children’s best interest at heart, there’s no guarantee of that. It will be Aunt Jane that will receive this money, not the children.
Once she has the money, she will have 100% discretion on what she does with it. Perhaps that would include passing it on to the children … and perhaps not!
3. Naming an estate as primary beneficiary
There are several disadvantages to an estate being a beneficiary of a life insurance policy.
First and foremost, whenever an estate is named as the beneficiary of a life insurance policy, the proceeds will pass through the probate process – delaying the payout of the proceeds and having the estate incur additional probate costs.
Additionally, in some states life insurance proceeds are exempt from the claims of creditors when there is a named beneficiary but not when the estate is named as the beneficiary.
If the owner of the life insurance policy did not have a will, the process to have the funds paid out may take quite a while, as the administrator of the estate must petition and then be appointed by the probate court before the estate can be settled.
Also, when an individual dies without a will, the state in which the individual resided determines how the assets will be distributed.
All or a portion of the life insurance proceeds may pass to someone that the individual did not intend to receive the benefit.
4. Naming only a primary beneficiary
Naming just one person as your beneficiary is not a good option since that person could die before you do – or in rare cases, die with you (at the same time).
If this were to occur, the life insurance proceeds would then be payable to your estate, and as I have already pointed out, there are pitfalls to that.
A good example of this is when a spouse is the Primary Beneficiary and there is no contingent beneficiary. If the insured and the spouse died simultaneously, the Uniform Simultaneous Death Act provides that the beneficiary (the spouse) will be presumed to have died first which would leave the proceeds to the insured’s estate.
5. Neglecting to update beneficiary designations
Let’s face it, beneficiary designations are only rock solid if nothing changes.
Unfortunately, life itself is constantly changing, which can have an impact on the life insurance policy's beneficiary designation..
People get married, have children, get divorced, get remarried and encounter estate changes.
No matter what your current estate plan or will says, the beneficiary that is on record at the insurance carrier will be the person to receive the life insurance proceeds whether that was intended or not.
The good news is that if there’s any question as to how a beneficiary designation should be shown on the policy, the beneficiary/title department at the life insurance carrier or a representative at your General Agency can advise you on this.
It’s very easy to make changes as necessary. Herein lies a great opportunity to offer a policy review to existing clients or to prospects where you weren't the original writing agent.
Just remember that if an improper designation exists at the time of a life insurance claim, the bell cannot be “unrung.”
That’s a tone you definitely don’t want to hear!
What’s been your experience with helping clients name a beneficiary?