Life Insurance: Getting the Beneficiary Designation Right

Failure to update beneficiaries is one of the most common oversights with life insurance policies. If someone gets divorced and fails to update their beneficiary designation, then the death benefit goes to the ex-spouse (assuming they were the primary beneficiary.) This will occur even if an updated will says otherwise.  Most people think a will supersedes a life insurance policy designation, but it does not. Just ask any lawyer! There are exceptions to this, such as when a decedent can be shown to have been incapacitated or “unduly influenced”, however, that is quite rare.  This type of oversight does happen on occasion, especially when the insured forgets about a small policy they purchased when they were fist married.

A more common oversight involves the contingent beneficiary designation.  Since most insurance companies will not pay life insurance proceeds to minor children, people often name a trusted friend as a contingent beneficiary. If a husband and wife were to die at the same time (in a car accident, for example), then the trusted friend would be responsible to make decisions about caring for the children and honoring the wishes of the parents.  In this case, it is very important to update the contingent beneficiary, especially if the relationship with this friend (or sibling or parent) changes over the years — and they often do.

Another common approach with minor children is to name a trust as the beneficiary (or contingent beneficiary).  The trust would stipulate how the life insurance proceeds are paid and to whom.  For example, it might not be a wise decision to give an 18 year-old $500,000 in one lump sum. With a trust, the money would be paid out over time or however the parent deems best.  It is important to hire a reputable, experienced estate planning attorney in order to have a trust drafted properly.

If you have adult children, then it is important to be clear as to the beneficiary designations.  Often times, people will divide up the death benefit in equal percentages among their children.  However, you can use the term “per stirpes” in the beneficiary designation.  This type of designation means if one of your children dies before you, then the benefit would go to his/her children, rather than going to the other beneficiary.  Alternatively, a designation of “per capita” means that the full benefit amount would go to the living child and not to the deceased beneficiary’s children.

It is important to work with a life insurance agent who understands the importance of beneficiary designations and can advise you when it is appropriate to seek the advice of an attorney.  It is equally important to review your policies periodically to make necessary changes and updates to your policies.

Greg Sanders       Peachtree Insurance Advisors      678-236-1600