Have you Checked Your Life Insurance Beneficiaries Lately?

Jennifer J. Mickelson

I have a 16 year-old client right now I’m representing. His father passed away two years ago, leaving my client as the beneficiary of his life insurance. Now we’re in the probate court asking for the court’s permission to spend any of the money. Not a good plan!

Here are some common mistakes people make when designating the beneficiary of their life insurance:

Not Naming a Contingent Beneficiary. What if the person you’ve named dies before you do? The entire policy proceeds will be going through probate, that’s what. It will be treated as if you had no beneficiary named at all and the proceeds will be payable to your probate estate.

Naming a Minor as the Beneficiary. Most life insurance companies with NOT pay policy proceeds to a minor. Like my case mentioned above, the company will, instead, require that the minor have a conservatorship set up to hold the funds. A conservatorship is a probate court proceeding in which someone applies to the court to be appointed as conservator. The conservator then manages the funds with court oversight. Because the court is involved in every step, so is an attorney, usually charging at least around $200 hourly. Each and every expenditure has to be approved by the court and the minor child gets 100% of the proceeds all at once when they attain age 18. The better plan is to set up a trust or a testamentary trust inside your Last Will and Testament. This allows your beneficiaries to have access to funds without court supervision and allows you to structure distributions over a period of time and under the supervision of someone you trust. It also allows you to distribute the funds outright when the minor is older.

Not Updating Your Beneficiary Designation. Time changes things! We all know that first-hand. People get divorced. People die. Babies are born. Do not neglect to update your beneficiaries when life events change circumstances.

Naming a Beneficiary Who Suffers from a Disability. If the individual you’ve named as a beneficiary of your life insurance receives public assistance of some sort as a result of a disability, they will generally lose their benefits once they inherit funds from you. Whereas, if you set up other ways to hold their benefits on their behalf (such as a special needs trust), you can still leave them access to the funds to supplement their benefits without disqualifying them from the benefits they receive.

Act now! Contact your life insurance company and find out who is named as your beneficiary. You should be checking your life insurance beneficiary designations at least once every three years. Put it on your calendar! If you have minor children, make sure you have set up a trust and/or will with a testamentary trust for them and name the trust as the beneficiary. If you have a beneficiary named who has special needs, make sure you have their share set up to pay to a special needs trust.