Life insurance can be a powerful financial and estate planning tool, but its benefits can be reduced or even eliminated if the wrong beneficiary is designated or a person fails to change beneficiaries when his or her circumstances change. This brief article details three common pitfalls to avoid.
You’ve designated the wrong beneficiary for your life insurance policy
Life insurance can be a powerful financial and estate planning tool, but its benefits can be reduced or even eliminated if you designate the wrong beneficiary or fail to change beneficiaries when your circumstances change. Here are some common pitfalls to avoid:
Naming your estate as beneficiary. Doing so subjects life insurance proceeds to unnecessary state inheritance taxes (in many states), exposes the proceeds to your estate’s creditors and ensures that the proceeds will go through probate, which may delay payment to your loved ones.
Naming minor children as beneficiaries. Insurance companies won’t pay life insurance proceeds directly to minors, which means a court-appointed guardian (who, if you’re divorced, could be your former spouse) will manage the funds until your minor-age children reach the age of majority. A better approach is to designate a trust as beneficiary. This allows you to determine who will manage the funds and how they’ll be distributed to your children.
For many people, the best strategy is to establish an irrevocable life insurance trust (ILIT) to purchase and own a life insurance policy, and to designate the ILIT as the policy’s beneficiary.
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