Should something happen to you during the life of your policy, the beneficiary (or beneficiaries) that you list will receive your insurance payout. Choosing who this person or persons should be is not a simple task.
Your beneficiary should be someone you trust who will be able to handle your affairs and take care of life as it continues on after you are gone. Unfortunately, many people make a mistake when choosing their beneficiaries. For some, the mistakes are caught and corrected. For others, it is too late.
Don’t make these 5 mistakes when choosing your life insurance beneficiaries.
- Selecting a minor child.
If you list your beneficiary as your minor child, you should know that insurance companies will not payout proceeds directly to minors. Doing so can leave your money tied up in court as a Judge appoints a guardian to oversee the money until your minor child reaches 18 or even 21. This is a great way to spend a nice chunk of that insurance money, too.
To save the hassle and to ensure your money goes to your kid, either list the beneficiary as someone you can trust to see that the money goes where you want it to. Or, create a trust and name the beneficiary as the trust.
- Forgetting to update your policy.
You should get in the habit of reviewing your policy regularly. At the very least, every couple of years. Says Matt Schmidt of Diabetes 365 “If you have a big life event, such as the birth of a child, the death of a beneficiary, or a divorce, you will want to re-visit your policy and adjust the beneficiaries listed. You always want to spend about 5 minutes per year, making sure the beneficiaries are updated on all of your life insurance policies.”
Wouldn’t it be disappointing to not update and leave all your life insurance money to your horrible ex-spouse? Or maybe to a business partner you are no longer associated with? Always keep your policy up to date.
- Believing your will has the final say over your life insurance.
Wills are important. You should definitely have one. But, they do not have the final word over your life insurance proceeds. In fact, they have nothing to do with your life insurance. While you will want to make sure that your will states you have a life insurance policy and provide the necessary information, the insurance company will always payout the funds to the beneficiaries listed in the policy, regardless of what the will states.
- Leaving out the details.
If you list John Brown as your life insurance beneficiary, you are going to create a world of trouble in determining which John Brown it is. This is going to take up a lot of time and money – and who knows if they will ever even find the John Brown you intended.
The point? Be specific. List details. Provide social security numbers. Date of Birth, the relationship the beneficiary has to you. Contact information. Anything and everything that will make you feel confident that your insurance funds will be paid out to the appropriate party – with ease – upon your death.
- Naming only a primary beneficiary.
What happens if you and your primary beneficiary are traveling home from dinner and tragically die – together? The life insurance company would pay the funds to your secondary beneficiary.
Oh, no. You didn’t list one. This is a huge mistake. Always list more than one beneficiary just in case.
Always make sure a contingent beneficiary is listed initially. You can always update beneficiaries in the future, but listing a second beneficiary is beneficial, especially if you and primary beneficiary die at the same time.