The Power of the Beneficiary Review

By Alan Friedman

Life insurance is extremely valuable to loved ones when a person dies. Unfortunately, if beneficiary designations are not properly done there can be unintended consequences.

That’s why it is so important to discuss your clients beneficiary plans on a semi-regular basis. 

Common Mistakes:

• Not naming a beneficiary at all.

  • Failing to designate a beneficiary at all leaves the fate of the policy's proceeds uncertain and subject to legal processes.

• Naming the estate as the beneficiary.

  • This puts the death benefit into the probate process.

• Not naming contingent beneficiaries.

  • Neglecting to name contingent beneficiaries raises complications if the primary beneficiary predeceases the insured.

    • Without contingent beneficiaries being named, the death benefit most likely will go into the insured’s estate which could potentially delay distribution or even result in the proceeds not going to the individuals the decedent wished.

    • Assets within an estate can be subjected to probate costs and creditor claims.

• Being ambiguous when naming beneficiaries. 

  • List all beneficiaries by name and the percentage they are entitled to receive. Unclear beneficiary specifications can lead to confusion and disputes.

• Naming minor children as beneficiaries.

  • In most cases, carriers will not issue proceeds directly to minors. This may result in necessitating court intervention to appoint a guardian until the child reaches adulthood.

  • For maximum flexibility, create a trust for the benefit of a minor child and name it as the beneficiary. With this arrangement, the insured can state how much money will be distributed to the beneficiaries and when.

• In a community property state, not naming your spouse as a beneficiary can create issues if the spouse has not waived a right to the death benefit.

  • In community property states, if income earned during marriage is used to pay premiums, then the spouse may have rights to the death benefit, even if they were not named as a beneficiary.

• Inadvertently disqualify a beneficiary from government benefits.

  • Individuals on government programs like Supplement Security Income or Medicaid may lose or be disqualified from receiving benefits if they have too many assets.

  • Naming a special needs trust as the beneficiary may help avoid this problem.

• Listing three different people on an insurance policy — one as the owner, one as the insured and a one as the beneficiary — thus creating the Goodman Triangle.

  • The IRS may view the premium payments paid by the owner as gifts to the beneficiary, which can result in unfavorable tax implications. 

Don't forget to review your clients policies' beneficiaries on a semi-regular basis. Circumstances change during life and having outdated beneficiaries can easily slip through the cracks without occasionally reviewing them. Regularly policy reviews is a great way to insure that your clients policies are in good order.

Regularly reviewing and updating beneficiary designations is paramount, as life circumstances evolve. Additionally, ensure that loved ones are informed about the location of policies to facilitate seamless access during critical times.