Who Shouldn’t Be Your Life Insurance Beneficiary? 7 Mistakes to Avoid

Life insurance helps people protect their loved ones from the unexpected, but a key part of buying the policy is choosing a life insurance beneficiary. Selecting the right person to receive the death benefit from your policy is important, as choosing the wrong person can lead to uncomfortable situations, including conflict between family members. 

This guide aims to help you avoid the common mistakes that people make when choosing a life insurance beneficiary. And whether you’re buying your first policy or making decisions about a current one, reach out to Farm Bureau for advice from a professional.

Mistake #1: Failing to Name a Beneficiary

This should be obvious, but it happens: getting a life insurance policy and not designating a beneficiary. If a beneficiary isn’t named in your policy, then your death benefit will generally be paid out to your estate. That can then lead to probate, which can make it difficult for your heirs to sort everything out. It can also be subject to claims of your probate creditors, lengthening the process. 

How to avoid this mistake: Name a primary, secondary and final beneficiary, and make sure to keep this information up to date.

Mistake #2: Designating a Minor Child

As a parent, your first impulse may be to designate your children as your beneficiary. But if they’re still minors, you should rethink this.

If your children are minors, they are not eligible to receive a life insurance payout, and that will complicate the payout process. A guardian may be appointed to handle the proceeds until the minor becomes of legal age. This option can be time-consuming and costly. 

How to avoid this mistake: Consider creating a trust that names the minor as the beneficiary then naming the trust as your beneficiary. The trust will pay out the proceeds that you set. This will allow the minors to have access to the funds when the time is right.

Mistake #3: Not Planning for a Beneficiary’s Death

Life insurance is about your death, so when you’re setting up your beneficiary, you’re probably not thinking about what will happen if they die before you. If they do, and you don’t assign multiple beneficiaries, you run into the issue of having your death benefit going to your estate, causing delays and extra expenses that you and your beneficiaries may not have accounted for. 

How to avoid this mistake: You can name multiple beneficiaries in a variety of ways: a primary and a secondary, in which case the secondary would receive the payout if the primary is deceased. You could do a “per capita,” distribution, in which your payout will be distributed evenly among the multiple beneficiaries listed. Alternately, you can select to go with a “per stirpes” option, which allows your beneficiary’s share to pass to their descendants if the beneficiary is no longer living. 

Mistake #4: Choosing an Untrustworthy Beneficiary

Unfortunately, not everyone whom you may feel the impulse to name as your beneficiary may be reliable. They may have had some history of financial troubles, or you may fear that they will mismanage the funds.

Sometimes family members may be the only people you feel should receive the death benefit because you want to take care of them after you’re gone. Or your beneficiary may be an adult child who is still learning how to be independent. Whatever your case is, remember that there are ways to make sure they are taken care of without simply designating them as your beneficiary.

How to avoid this mistake: Instead of simply disbursing the funds to loved ones who may mismanage them, you can consider naming a trustee to help manage the funds, so your heirs are able to receive the money. The trustee you assign will hold the legal title of the assets and help distribute the funds appropriately.

Mistake #5: Naming a Specific Purpose

When selecting who will be your beneficiary, you want to provide as many details and specifics as possible. For instance, when you first sign up for the policy, you may want the death benefit to be paid out first to your house’s mortgage, thus financially supporting your family.

But perhaps your family finishes paying off the mortgage sooner than expected. There is a risk when listing someone’s mortgage or naming a child’s education expenses as a beneficiary if the funds are no longer needed for that purpose at the time of payout. 

How to avoid this mistake: Creating a will is a great way to express where and how your assets should be distributed. Even if you have provided specific notes in your policy, updating your will regularly can help prevent any issues that may arise at the time of payout.

You can specify exactly what you want each beneficiary to receive and communicate all other important information your family members or heirs should know with a letter of wishes and records. This letter of wishes and records is not legally binding, so it is best to include it with your will.

Mistake #6: Designating a Spouse by Default

If you have a spouse, it is more than likely they will be your primary beneficiary when it comes to your life insurance policy. This is generally the first option for many. But don’t forget: A spouse is not a blood relative. Something like divorce may complicate the payout. The payout may also be complicated if their death occurs before yours.  

How to avoid this mistake: Be sure to regularly review and update your list of beneficiaries, especially after major life events like a divorce.

Mistake #7: Not Communicating With Designated Beneficiaries

Be sure to communicate with the people you list as your beneficiaries after you select them. On occasion, some people don’t want to be listed as beneficiaries, and this can cause disputes after death. 

How to avoid this mistake: Be sure to have an open and honest conversation about your financials and go through the details of your policy. Make sure everyone is on the same page to avoid confusion later. Sit down and talk with the people you have chosen to list as a beneficiary and allow them to be aware of the expectations you have.

We’re Here for You

We know that choosing a life insurance beneficiary can seem like a lot, but Farm Bureau can help walk you through the process to make the best decisions for your family. Reach out today!