Life insurance is one of the most important financial products you will buy. It is there to protect your loved ones in case you pass. But naming the wrong beneficiary on your life insurance policy can prevent them from getting the financial protection you expected.
You can name anyone with an insurable interest as the beneficiary on your policy. This is anyone who could be financially harmed due to your death. However, naming the wrong beneficiary can result in the benefit not going to who you want.
Who should you never name as your life insurance beneficiary and why?
Key Takeaways:
- Life insurance is one of the most important financial products you can purchase
- Anyone with an insurable interest can be named as your policy’s beneficiary
- However, do not name your estate, minor children, or pets as beneficiaries on your life insurance policy
- Life insurance death benefits are not accessible by creditors unless they wind up in your estate
- Minors can’t receive the life insurance proceeds
- Make sure you are keeping your life insurance policies up-to-date after major life events
Who you should never name as a beneficiary on your life insurance policy
The following are who should never be named as the beneficiary on your life insurance:
- Your Minor Children
- Your Estate, and
- Your Pets
- No named beneficiary
Doing this will result in your death benefit going to probate court where it can be claimed by your creditors or be part of a long, expensive probate process.
Don’t name your estate as a life insurance beneficiary
Life insurance is a vital tool when estate planning. And people may think it makes sense to list your estate as the beneficiary. You have a will and testament that determines how your assets are dispersed already, so why not just add your life insurance benefit to it?
Don’t.
Leaving your estate as the beneficiary can mean that your family gets only some or none of your benefit.
Estate assets are handled in probate.
But one of the main reasons life insurance is a great estate planning tool is it passes life insurance benefits outside of probate. In general, your death benefit passes to the beneficiary automatically upon your death, and completely outside of probate.
Avoiding probate is a major positive as it prevents creditors from taking your life insurance benefits.
Listing your estate as the life insurance beneficiary means:
- Assets have to go through the probate process where a judge determines what creditors have claims to your assets
- Creditors collect repayment from your estate
- After all debts are repaid, the rest of the assets get dispersed based on your will
If you have debts and list your estate as a beneficiary, creditors will have the first right to your benefits. Instead, list the people who you want to receive the death benefit directly as beneficiaries.
Don’t name minors as your life insurance beneficiary
Most people purchase life insurance to protect their spouse and children. If you pass, you want to ensure they receive financial support to replace your lost income. Supporting your children as they grow is the main reason your life insurance needs change throughout your life.
But just because you purchased a policy to provide for your children, doesn’t mean you should name them as the beneficiary.
In most states you need to be a legal adult in order to receive the money. If you list a minor as a beneficiary, a court-appointed guardian will hold onto the benefit until the child reaches adulthood.
Often, the surviving spouse is the court appointed guardian, but if that isn’t possible, it can take years for the system to find a guardian.
This long delay in your child getting access to the benefit can defeat the entire purpose of the policy. You purchase life insurance to provide for your child and they can’t get the money till they are an adult.
In order to properly provide financial support for a child, you want to create trust and name a trustee to manage money for your children. Then name the trust as the beneficiary of your policy.
Don’t name your pet as your life insurance beneficiary
Your pet can’t do the necessary steps to receive a death benefit. Since your pet can’t open accounts, sign legal documents, or file a death claim, they are not able to be the recipient of a life insurance benefit.
Instead, if you want to leave money to ensure your pet’s needs are taken care of, you can set up a pet trust as the beneficiary. With trusts you can set rules for when and how the money is used that are legally binding.
As part of a pet trust you can assign a trustee to handle the funds.
Every state has laws for pet trusts and the ASPCA has details of each states rules. Pet trusts dissolve when the pet dies.
Don’t leave your life insurance beneficiary blank
You should never leave your life insurance beneficiary blank. And you should always name a contingent beneficiary as a back-up. This is also known as a secondary beneficiary.
Additionally, you should review your beneficiaries periodically to ensure they are accurate and up-to-date.
If you don’t name a beneficiary, or, you don’t name a contingent beneficiary and the primary one is unable to receive the benefit, then you death benefit will go to your estate. This puts it through probate and opens it to creditors.
The Final Word
You purchased your life insurance product to protect your loved ones. The last thing you want is to pay premiums for a policy and then have the benefit not be there because you named the wrong beneficiary.
To ensure that your money gets to the right person, keep your beneficiary information up-to-date and make necessary adjustments to both the primary and contingent beneficiaries for major life events.
Updating beneficiary information is typically easy to do and takes little time.
Do not name your estate, minors, or pets as the beneficiary on your life insurance policy. And do not leave the information blank.
Do set up a trust for minors or pets to receive the money and disperse it as you desire.
Do not list your estate, minors, or pets as the beneficiary on your life insurance policy. And do not leave the primary or contingent beneficiary blank.
In all 4 cases, your death benefit will wind up in probate court where you open it up to creditors and the long, expensive probate process.
A trust is a legal entity that can receive your death benefit. Each trust has a named guardian who is legally obligated to follow the rules you set out in the trust documents. Since minor and pets are unable to receive a death benefit, you can use a trust to pass the proceeds to them and give them access to your benefit.