Berman & Asbel, LLP

Life insurance can avoid probate, don't make beneficiary mistake II

Last week, life insurance was the topic of our Pennsylvania Probate and Estate Administration Blog. Specifically, we wrote about some mistakes involving beneficiary designations that can cause problems for the intended beneficiary when the time comes to pay out the proceeds.  

The first post in this two-part series discussed the naming of a minor child or special needs child, the possible consequences and how to navigate viable solutions. We also talked about the tax effect that can occur during the administration of an estate, despite the general assumption that all life insurance proceeds pass tax free. So what are the other mistakes we promised to warn our readers about this week? 

The next major issue involves the old adage that "the devil is in the details." This is significantly true in life insurance beneficiary designations as well. For instance, many people assume that putting one name on the form is sufficient. In most cases, that person is a spouse, but what happens if your spouse predeceases you? In most cases, it goes right into the taxable estate -- often the exact result that the testator had intended. Name a secondary or final beneficiary. 

Next, be clear about designations. This is true for every gift, whether in a will, trust or life insurance policy. It may seem silly, but failing to be specific can cause unintended results. Include information such as an address, job title and other specific facts about a named beneficiary. It not only helps locate them, but it can also avoid ambiguity. Who does "my children" include, biological, adopted, stepchildren or only ones from a previous marriage? Which John, the accountant or the real estate agent? 

The last major mistake is failing to update a beneficiary designation or assuming that the terms of a will can make changes to the life insurance policy. In some cases, the policy holder will change their mind about who they want to receive the proceeds. Did the policy holder dissolve his marriage? Did the beneficiary pass away? The beneficiary designation needs updating under certain situations. 

As for the "will assumption," naming a different beneficiary for the life insurance proceeds in a will does not override the designation made in the policy. A life insurance policy is a contract with the insurance company, and they will pay out according to the contract, not another document. 

Source: Fox Business, "Naming Life Insurance Beneficiaries: 10 Ways to Screw up," Barbara Marquand, May 22, 2013

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