Six beneficiary mistakes that cost families money

Your will does not control your life insurance

This surprises people every time. A life insurance policy is a contract, and it pays whoever is named on the beneficiary form. If your will says one thing and the form says another, the form wins. The same is true for retirement accounts.

Which means an outdated form quietly overrides an expensive estate plan. Reviewing your designations takes about twenty minutes and is the highest return per minute of anything in your financial life.

Mistake one: naming a minor child directly

Insurance companies cannot pay a large sum directly to a minor. Instead a court appoints a guardian of the property, the money sits under court supervision with the associated cost and delay, and at eighteen your child receives whatever is left in a single check.

The fix is to name a trust for the child’s benefit, or to use the New York Uniform Transfers to Minors Act with a named custodian for smaller amounts. Either approach puts an adult you chose in charge and lets you control the timing.

Mistake two: no contingent beneficiary

If your primary beneficiary predeceases you, or dies with you in the same accident, and no contingent is named, the benefit typically defaults to your estate. That means probate, potential creditor claims, and months of delay for money your family needed immediately.

Name a contingent. It costs nothing and takes one line on a form.

Mistake three: not updating after a divorce

An ex spouse who is still named on the policy is still the beneficiary in most circumstances. New York has statutes that revoke certain designations upon divorce, but they do not cover every policy type and they will not help if the policy is governed by federal law such as ERISA plans. Do not rely on a statute to clean up after you.

Update the form directly, and check whether a divorce agreement requires you to maintain coverage for the benefit of your children. Many do, and quietly cancelling a policy in that situation creates a legal problem on top of a financial one.

Mistake four: naming your estate

Naming your estate as beneficiary throws away one of the best features of life insurance. Proceeds paid to a named person go directly to them, quickly, and outside probate. Proceeds paid to an estate go through probate, become visible to creditors, and take considerably longer to reach anyone.

Name people, or name a trust. Almost never name the estate.

Mistake five: vague wording

"My children" sounds clear until there is a stepchild, an adopted child, or a child born after the form was signed. Use full legal names, dates of birth, and explicit percentages that total one hundred.

Also decide what happens if one of them dies before you. Per stirpes means their share passes to their own children. Per capita means it is redistributed among the surviving beneficiaries. The words matter, and most forms let you specify.

Mistake six: never reviewing it again

A designation made at 28 rarely still reflects a life at 45. Review after any of these, without waiting for an annual reminder:

• Marriage, divorce, or remarriage
• A birth or an adoption
• The death of anyone named on the policy
• Creating or amending a trust
• Any change in your relationship with a named beneficiary