Life insurance is one of the best ways of ensuring that you provide for your loved ones and heirs beyond the grave. Naming the beneficiary to receive compensation after you pass away is a big decision that is often overlooked and not taken seriously. By choosing the right beneficiaries you will avoid contesting life insurance beneficiary claims in future. Despite naming beneficiaries being a seemingly easy and simple task, several mistakes result in unintended and far reaching consequences.
Mistakes to avoid
Failing to name a beneficiary
The most obvious and common mistake made by most people is not naming any beneficiary when taking a life insurance policy. This omission often leads to unnecessary problems including but not limited to avoidable tax consequences, and loss of property/investment. If at the time of your death you have not named any beneficiary to your life insurance policy, the insurance company may decide to pay the compensation settlement to your estate, which may most likely give rise to other potential consequences and problems.
Naming minors as beneficiaries
Insurance companies do not pay life insurance proceeds directly to minors. In a situation where you have named a minor as the beneficiary, a guardian is appointed by the court to receive compensation on behalf of the minor. This is usually a lengthy and expensive process and can also be quite risky if the appointed guardian cannot be trusted with handling the compensation proceeds until the minor attains legal adult age.
Ineligibility for beneficiaries with special needs
If you name a person with special needs or any form of disability as the beneficiary, once they receive the benefits from the proceeds they may disqualify from receiving any government support. This may expose the beneficiary to future financial hardships especially if the amount of money they receive as benefits is not enough to last them throughout the remaining part of their lives. If you want a person with special needs to be the beneficiary of your life insurance policy, the best thing to do is create a trust fund for them rather than have them receive the benefits directly.
Failure to update beneficiary details
If you experience a major life development such as a divorce or death of your spouse, it is necessary to update beneficiary details in your life insurance policy. Failure to update these designations may lead to the wrong person receiving your life insurance policy benefits. For example, if you do not update your beneficiary’s designations after divorce, the benefits may be paid to your ex-spouse which may not be what you wanted or desired to happen.
Naming only one beneficiary
Naming a single beneficiary may also be a very risky move especially if the beneficiary dies before you do and you fail to update the beneficiary details. In such a scenario, the judge decides how benefits from your policy are to be distributed, which may be contrary to your desires. To reduce this risk, it is advisable to name at least two beneficiaries or have a contingent beneficiary who will receive the benefits in case the first beneficiary dies.
When filling out a life insurance policy, it is advisable to seek advice from insurance experts and estate lawyers on the right and the best way to fill out the form. This goes a long way in ensuring that the right beneficiaries receive the benefits in the event of your death.