Choosing Your Life Insurance Beneficiaries: Common Mistakes to Avoid

When people shop for life insurance, most of the attention goes to the coverage amount and the monthly cost. The beneficiary section usually gets filled in quickly at the end of the application. But that short form decides who actually receives the money, and in most cases it carries more weight than your will.

If you live around Mooresville, Lake Norman or anywhere in Iredell County, here's a clear look at how beneficiary designations work, the mistakes that can cause delays or send money somewhere you didn't intend, and a few simple habits that keep things on track.

How beneficiary designations work

A beneficiary is the person, people or organization that receives the death benefit when you pass away. Life insurance generally pays according to the beneficiary designation on file with the insurance company, not according to your will. So if your will says one thing and your policy form says another, the policy form usually wins.

Most policies let you name two levels:

• Primary beneficiaries are first in line. If you name more than one, you choose how the benefit is split, such as 50/50 or by percentage.
• Contingent beneficiaries are the backup. They receive the benefit only if no primary beneficiary is living when the claim is paid.

You can name a spouse, children, other relatives, a friend, a trust or a charity. You generally don't need anyone's permission to name them, and they don't have to be related to you.

Common mistakes to avoid

Leaving it blank or naming no backup

If there's no living beneficiary, the benefit is often paid to your estate. That can mean the money goes through probate, which takes time and may expose it to the estate's debts before your family sees it. Naming at least one contingent beneficiary is one of the easiest ways to avoid this.

Naming young children directly

Insurance companies generally won't hand a large benefit straight to a minor. If a child under 18 is named directly, a court may need to appoint someone to manage the money, which adds time and cost. Parents often name a trust instead, or a custodian for the child under North Carolina's Uniform Transfers to Minors Act. An estate planning attorney can help you decide which fits your family.

Forgetting to update after life changes

Marriage, divorce, a new baby, a death in the family or a blended family are all reasons to look at your form again. Don't assume a divorce automatically removes an ex-spouse. The rules vary by state and by type of plan, and some coverage through work may simply pay whoever is listed. The safest move is to update the form yourself.

Being vague

A designation like "my children" can raise questions later, especially in blended families or if a child passes away before you do. Use full names, and ask how the policy handles a beneficiary's share if that person dies first. Some forms let you choose "per stirpes," which generally passes that share down to the beneficiary's own children, rather than splitting it among the surviving beneficiaries.

Not thinking about benefits a loved one depends on

If someone you want to provide for receives needs-based government benefits, a lump sum paid directly to them could affect their eligibility. In that situation it's worth talking with an attorney about options such as a special needs trust before you name them.

Remember every policy has its own form

Each policy you own has its own beneficiary designation. That includes term life, whole life and final expense policies, any mortgage protection coverage and group life insurance through your job. Annuities and retirement accounts have their own forms too. Updating one doesn't update the others. If you have coverage through work, our post on whether life insurance through work is enough covers a few more things to check.

Also note whether a beneficiary was named as revocable or irrevocable. Most are revocable, which means you can change them at any time. An irrevocable beneficiary generally has to agree before you can make a change.

A simple beneficiary checkup

1. Find each policy and ask the insurer or your agent who is listed today.
2. Confirm full legal names and current contact information.
3. Make sure you have at least one contingent beneficiary.
4. Check that the percentages add up to 100 percent.
5. Let your beneficiaries know the policy exists and where to find the paperwork.
6. Set a reminder to review it after any major life event, or every few years.

This post is general information, not legal or tax advice. For trusts, estates or special situations, an estate planning attorney is the right person to ask.

Talk it through with a local broker

I'm Matt MacMillan, an independent insurance broker based in Mooresville. I can help you review the beneficiaries on policies you already have, walk you through the change forms, and if you need more coverage, compare options from the companies I represent. You can read more on my life insurance page, and there's no fee for my help.

Call me at (704) 802-2523 or request a call below, and we'll go over it at your pace.

This article is general information, not legal, tax or financial advice. Coverage, rules, features and availability may vary by insurance company and state, and every policy is subject to the insurer's underwriting and eligibility rules.