Life insurance is essential for protecting the people who depend on you. We at Lane’s Insurance have a team of dedicated and experienced life insurance professionals who are able to help you understand the different types of coverage, how they benefit you and your family, and how to fit your coverage into your budget.
But choosing the right amount of life insurance is only part of the process. You also need to think carefully about who will receive the proceeds when you die.
In your will, your beneficiary designation determines who receives your life insurance payout, and it can have significant financial and estate-planning consequences. As insurance brokers, we encourage our clients to look beyond simply naming someone and consider whether their beneficiary designations still reflect their wishes.
Here are five common life insurance beneficiary mistakes we often see, and how to avoid them.
1. Naming a beneficiary and never reviewing it
One of the most common mistakes is setting up a life insurance policy, naming a beneficiary and then forgetting about it.
Life changes. You may get married, have children, divorce, or remarry. You may even experience the death of someone you previously named as a beneficiary. As is usual, financial circumstances also change considerably over the years.
For example, many name their parents as beneficiaries when purchasing a policy as a young adult. Years later, you may have a spouse and children who now depend on you.
It is a good idea to review your beneficiary designations whenever you experience any major life event and periodically as part of your overall annual financial review.
2. Forgetting to name a contingent beneficiary
We highly recommend naming a contingent beneficiary as well as a primary beneficiary.
A contingent, or secondary, beneficiary provides another option for receiving insurance proceeds if your primary beneficiary passes away before you.
Your appropriate contingent beneficiary structure depends on your circumstances, but considering a backup beneficiary can help prevent unnecessary complications.
3. Naming minor children without considering the implications
Parents often want their life insurance proceeds to benefit their children, particularly when their children are young. However, naming a minor child directly as a beneficiary can create complications.
A minor generally cannot personally receive and control a large insurance payment. Depending on the circumstances, a trustee or court-appointed person will likely become involved in managing the money until your kids reach the age of majority.
There are better ways to structure your life insurance coverage when young children are involved. A trust or other estate-planning arrangement often provides greater control over when and how your life insurance payout is available to your children. That’s where our experts can come in and help guide you.
4. Assuming your will automatically changes your beneficiary
Many assume that changing your will automatically change the beneficiary on your life insurance policy.
Generally, a life insurance beneficiary designation is separate from your will. If you want to change who receives your insurance proceeds, you typically need to make the appropriate change with your life insurance company. This is particularly important following a divorce, remarriage, or other major life event.
5. Naming your estate without understanding the consequences
Naming your estate as the beneficiary of a life insurance policy can sometimes be appropriate, but it should not be done just because you’re not sure who to name.
When your estate is the beneficiary, the insurance proceeds become part of your estate rather than going directly to an individually named beneficiary. This can have implications for how the money is distributed and may expose the proceeds to claims against the estate.
There can also be circumstances where naming the estate is useful, however, particularly as part of a carefully structured estate plan. The important point is to understand why you are making the estate designation rather than using it as a default option.
Different types of life insurance
The most common types of life insurance are term and permanent policies.
Term life insurance policies are valid for a certain period of time, and are usually purchased for 10 or 20 years. They generally carry a lower premium as compared with waiting until your 30s or later. This helps keep costs reasonable. Many choose to start with term life insurance, then switch to a permanent life insurance plan.
Permanent, or “cash-value” life insurance policies do not have a set term, and are purchased for an indefinite period of time. With this type of policy, money can be taken out of the plan as a loan or if the plan is surrendered. This can be very helpful as life’s unexpected surprises arise. The three types of permanent insurance are whole, universal and variable.
Count on Lane’s for the best products in the Alberta insurance industry
Lane’s Insurance is a leading Alberta-based brokerage, providing a comprehensive range of competitively priced insurance products offered through the province’s top carriers.
Beyond life insurance, you can also count on Lane’s for:
- Auto insurance and motorcycle insurance
- Home insurance and condo insurance
- Tenant insurance for renters
- Travel insurance for out-of-province travellers
- …and much more!
To learn more, please contact a Lane’s life insurance customer service representative.
