A life insurance policy can be tremendously helpful for whomever you designate as a beneficiary. You may already know whom you want to name – perhaps a child or your spouse. However, naming a life insurance beneficiary should not be something you do without proper consideration.
If you make mistakes when designating someone as the recipient of your life insurance proceeds, your wishes may not pan out as you want. This may cause issues for your family after you pass away. Here are some mistakes to avoid when naming an heir to your life insurance policy.
1. Choosing a minor
While you may want to purchase life insurance to provide for your minor children, be careful. You cannot put the name of your minor child on the policy. An adult must be responsible for the life insurance funds. Instead of putting your child on the policy, you have these options:
- Naming a trustworthy adult who will transfer the funds to your child
- Choosing an adult custodian
- Setting up a trust for your child and naming it as your beneficiary
If you make the mistake of designating a minor child, a probate court may need to appoint an adult to manage the proceeds.
2. Being unclear
You may think it is enough to put something like "my kids" on your life insurance policy. However, this will only create confusion down the road, especially if you have stepchildren. Always be specific and use full names.
3. Failing to name an alternate beneficiary
Always keep in mind that the person you name as a beneficiary may die before you do. Be sure to name a secondary person to receive your life insurance benefits. You do not want your life insurance funds to go through probate. If your funds are subject to probate, creditors may seek to collect it, or your family may need to wait a long time to get access to it.