Most Common Mistakes On Life Insurance Policy

1. Update your policy regularly: We all know how it happens. You have another kid, or you get married or divorced, and life is chaos…but do not delay updating your life insurance policy. If you talk to any lawyer in America, they will tell you what portion of their practice is helping a grieving family member who has just discovered that the beneficiary on their partner’s life insurance policy is still a former spouse. Ouch! Don’t let that be your legacy.
   
   
2. Name more than one beneficiary: A related issue to the above, lots of people think they can “one-and-done” it when it comes to naming a beneficiary. If you list your spouse, for example, and you both die together in a car accident, did you think to name a secondary or even a final (ie. third) beneficiary?
   Make sure you have that down, otherwise your life insurance could take years to reach your their due to a lengthy probate period, or worse, it could be assigned to your estate which means creditors can claim it before any of your intended beneficiaries.
   
   
3. Don’t name a child as the beneficiary: Most people know that children under the age of 18 cannot receive a life insurance payout. What you may be surprised to learn is that in the absence of a named secondary beneficiary, the court can appoint a guardian and pay that person your life insurance money. If you and your spouse die together, and your kids wind up in the custody of your sibling, that family could receive the life insurance money. You better hope they have the values you espouse.
   To avoid all of this, set up a trust on behalf of your child, so the trust becomes the beneficiary, and set up a legal guardian for your child.
   
   
4. Be exceptionally detailed: People often list their child’s name and neglect to provide addresses (if you kid has a home or more or less permanent address) or their social security number. Leaving money to a charitable organization? Then list the organization’s name, address, and tax ID number. It may seem obvious who you’re talking about, but every situation is different and it could take ages to track someone or some organization down without these details.
   A further important detail: stipulate how your children can use the money! Believe it or not, you can earmark your life insurance for education or a specific type of investment, etc. It’s your money, so you can decide how to communicate those values to your children when you’re gone.
   
   
5. Specify how you want to split between beneficiaries: You will want to make sure you specify whether you wish to allocate life insurance money to your children on a “per capita” or a “per stripes” basis. Per stripes means per family. If your son has 4 children and your daughter has 1 child, and your son dies before you (or with you), but you have him listed as a beneficiary still on your life insurance, a per capita split would be 4/5ths going to his family and 1/5th going to your daughter. If you have a per stripes allocation on your policy, each family would get 50% of the payout.
   
   
6. Don’t get taxed: This is one of the least common issues, but sometimes a wife/mother will take out a life insurance policy for her husband/the father of her kids, but name an adult child as a beneficiary. Basically, whenever 3 people are involved in the policy, you have a problem. Let your family members get their own policy: when the payout occurs, our above hypothetical mom will be hit with an enormous tax bill because this constitutes a “gift” under federal tax law.
   
   
7. Other rare but potentially pertinent problems: If you name an adult child who has special needs as the beneficiary of your life insurance policy, you could cut off their access to Supplemental Security Income and Medicaid. Actually, you almost certainly will if the payout is more than $2,000. As with a minor, instead set up a trust and appoint a legal guardian for your child.

Another rare problem is if you live in a community-property state, which is any state in which goods or properties obtained after marriage are automatically considered joint property with your spouse. In these states, you need to have your spouse officially waive their right to be named beneficiary if you wish to name your adult child, or anyone other than your spouse. The community-property states are:

• Arizona
• California
• Idaho
• Louisiana
• Nevada
• New Mexico
• Texas
• Washington
• Wisconsin

These are all the most common issues that your family could face if you don’t take action. And remember, your will does not trump your policy! If you change your last will and testament, and think that your life insurance is automatically updated, think again. The beneficiary listed on your life insurance policy is the ultimate receiver of your life insurance payout provided you didn’t make any of these common mistakes.