If you make a mistake in naming beneficiaries for your life insurance policy, the people you love will end up being hurt. Insure.com provided a list of the 10 life insurance beneficiary mistakes to avoid. We elaborate on how they’ll affect you and how to fix them.
1. Naming minor children
If proceeds of your life insurance are directed to your minor child (instead of to a trust for his/her benefit), a Judge will decide who controls the proceeds and when your child receives them. And your child could get access to all of that money at 18! That’s bad news. And unnecessary. The Law Office of Keoni Souza can counsel you on the best way to leave life insurance proceeds to minor children.
2. Naming a person with special needs
By naming a child with special needs or other person eligible for government benefits as a beneficiary, you could unwittingly disqualify them from receiving those benefits. Instead, you could name a special needs trust. The Law Office of Keoni Souza can help you with that.
3. Not considering joint property and/or spousal rights
You don’t have to name your spouse as a beneficiary, but if you live in a community property state, your spouse will need to sign a waiver before you can name someone else as beneficiary. Hawaii is not a community property state, but if you’ve lived in one while married before moving to Hawaii, this is something you should consider. And, if you name a married adult child as the beneficiary of your policy (without a trust), you could be putting your child’s inheritance at risk inadvertently.
4. Ignoring tax consequences
While life insurance proceeds are usually income tax-free, they are subject to the estate tax. Talk to us about these issues so we can identify any traps for the unwary.
5. Trying to use your Will
A properly executed beneficiary designation form always trumps your Will, so don’t make the mistake of thinking you can change beneficiaries by naming someone else to receive insurance proceeds through your Will.
6. Failing to update
Review your beneficiary designations every time you have a significant life change, or at least every three years, to ensure the correct person receives the proceeds.
7. Not being specific
You should name your beneficiaries in as specific a manner as possible, which means using their legal names, not just a designation such as “my spouse” or “my children.”
8. Not informing family or losing track of policies
If you have a life insurance policy, tell your family about it. Otherwise, it may be overlooked and the benefit never claimed. We track our clients’ assets using a Family Wealth Inventory that is updated regularly so no assets are lost after your passing. The Hawaii Unclaimed Property Program has hundreds of millions of dollars from unclaimed life insurance payouts and other unclaimed property.
9. Not considering individual circumstances
If you leave a large sum of money to an adult child with a substance abuse problem or someone not equipped to handle money, this can lead to more problems. Consider establishing a trust that can protect your beneficiaries’ inheritance. We can even protect these assets from bankruptcy, creditors and divorce, for multiple generations.
10. Naming only one beneficiary
If you name only one beneficiary and that beneficiary dies at the same time, or before you, the proceeds of your insurance could end up directed by State law or a Judge. To prevent this from happening, name secondary and tertiary beneficiaries.
This article is a service of the Law Office of Keoni Souza, LLC, an estate planning law firm in Honolulu, Hawaii. We don’t just draft documents; we ensure you make informed and empowered decisions about life and death, for yourself and the people you love. That's why we offer a Family Wealth Planning Session, ™ during which you will get more financially organized than you’ve ever been before, and make all the best choices for the people you love. You can begin by contacting our office today to schedule a Family Wealth Planning Session and mention this article to find out how to get this $750 session at no charge.
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