We hope that the life insurance we have will help provide financial security and increase peace of mind. After all, that’s what it’s for. Naturally, after we buy, we hardly ever look at our life insurance policies again. Often, we put them in a drawer or a filing cabinet. Then, it’s a matter of “out of sight and out of mind.” Unfortunately, neglecting to check on your policies can be a big mistake.
So, what’s the best way you can help protect yourself and your family? By simply reviewing your life insurance policy portfolio and beneficiary designations with your advisor every year.
If you haven’t reviewed your policies recently, consider doing so with an advisor. Remember, with legal capacity having an unknown expiry date, time really is of the essence in this matter.
12 beneficiary mistakes you can avoid
1. You could unintentionally exclude a child or grandchild
Children are born and adopted. And families change. But, what if your beneficiary designations don’t grow with your family? You may accidentally exclude some from their share of your life insurance benefit.
By reviewing the policy, you will:
- see what you had in mind initially, and
- ensure it reflects your current plan.
2. You might include someone you want to exclude
Life happens and some of the people you initially wanted to include as beneficiaries fall out of that category. A few examples of beneficiaries we usually don’t want to have designated may include:
- spouses of divorced children,
- a former or deceased spouse,
- family members who have passed away, and
- business partners of businesses you no longer own
3. Making your estate the beneficiary of your policies
Some people don’t know what to do with their insurance beneficiaries and default to their estate. For many jurisdictions this means that the otherwise tax-free life insurance payout becomes subject to probate tax. Further, when an estate goes through probate, your beneficiaries and amounts paid to them can become public knowledge.
4. Not providing the proper trustee for minor children beneficiaries
Not having a trustee for minor children may lead to the government getting involved with handling the money for minors. Do you really want your executor to have to apply to the Public Trustee to settle this? What if your minor children are no longer minors? Ensuring the proper trustee is in place can reduce unnecessary complications.
5. Not providing for special needs children
Some children have identifiable special care they would need if left on their own. Not making these arrangements and funding them with your life insurance could mean leaving your most vulnerable beneficiary in an uncertain position.
6. Designating dollar amounts from policies for beneficiaries
At one point in time, you’d have a $250,000 benefit for five equal beneficiaries split into $50,000 each. This is an old approach that could cause unnecessary delays due to additional dividends or loans. Today, we recommend naming the five beneficiaries and note 20% each.
7. Not naming a contingent beneficiary
If your planned beneficiary were to predecease you, your insurance proceeds could:
- revert to your estate, and
- be subject to taxes.
Be sure to name a contingent or ‘back-up’ beneficiary.
8. Not using settlement options
Large windfalls of cash could be a challenge to some beneficiaries. Did you know that you can control how and when your money is paid out? Doing so could protect all beneficiaries and ensure the reasonable payout of the benefit according to your wishes. An advisor can help you do this for all your policies, if necessary.
9. Forgetting about beneficiaries of disability insurance policies
Some other policies— like disability insurance —can have death benefit payouts. Not naming a beneficiary, or having the wrong name, can disadvantage those who matter most. And at the most difficult time. Be sure to designate a beneficiary on all benefit accounts.
10. Forgetting to include the charitable causes that matter to you
Sometimes the reasons we have life insurance change. We may have a policy that we want to direct to an important charitable cause. This could leave a wonderful legacy and a tax credit to your estate.
11. Inconsistency between policies and the beneficiary designations
A will may direct the proceeds of a policy to someone in conflict with the beneficiary designated in the insurance policy. This can cause confusion, delays, and unforeseen expenses. Ensure you align your will and your policies.
12. Not keeping a separate record of the designations and values
How can an advisor benefit you and your estate planning? They can help by compiling all your beneficiary designations and their value. This way you know what you have and why you have it.
One easy way to help avoid beneficiary mistakes
Ultimately, a helpful solution to these beneficiary mistakes is to review your policy and beneficiaries with your advisor annually. That way, you can:
- reconsider your decisions about your life insurance proceeds and
- update or adjust them as necessary.
Remember, you need to make these changes while you still can. If the pandemic has taught us anything, it is that life is very uncertain and unpredictable. Make sure the beneficiary choices in your policy portfolio reflect your best wishes.
To review your own policies, or better understand your life insurance options, talk to your advisor. Don’t have an advisor? Find an advisor near you.
Andy Kovacs is a Sun Life advisor, Certified Financial Planner and president of Andy Kovacs Insurance & Financial Solutions Inc. in Markham, Ontario. Follow Andy on LinkedIn.
This article is meant to provide general information only. Sun Life Assurance Company of Canada does not provide legal, accounting, taxation, or other professional advice. Please seek advice from a qualified professional, including a thorough examination of your specific legal, accounting and tax situation.
