Mistakes People Make When Choosing Life Insurance Beneficiaries
Which are the common mistakes people make when naming beneficiaries for their life insurance policy?
- Failure to update beneficiaries list
- Omitting details of beneficiaries
- Failure to inform beneficiaries
- Naming only one beneficiary for the policy
- Giving no guidelines for young beneficiaries
- Clash between will and life insurance
Many people think that choosing beneficiaries is the easy part of signing up for life insurance. However, there are several occasions when the payout fails to benefit the recipient all because the policy owner or drafter made mistakes when designating beneficiaries.
Mistakes – Beneficiaries not updated
This is a basic, yet common error in the operation of a life insurance policy. The policy owner may have undergone a divorce or may have lost their children but failed to update the beneficiaries in the policy. This could lead to complications and mistakes in the event of their death.
Imagine a scenario where one has divorced and remarried and then died without altering the beneficiary on their life cover. The first wife may become the unintended beneficiary simply because the policyholder failed to update it.
To avoid such scenarios you need to review and update your life insurance policy every three years or so. After every life event such as marriage or the birth of a child, be sure to do a review.
Mistakes – Lack of details
Omitting details of nominated beneficiaries is a common mistake. Instead of giving their full names, personal and contact details, policyholders put general terms like “my children”. While the funds may eventually be released to them, the process will take needlessly long as the insurer has to do a search to ascertain the identity of the beneficiary. Besides providing full details of the beneficiaries, it is important to specify how the payout is to be divided among them if they are many.
Mistakes – Failure to inform beneficiaries
If you have named someone as a beneficiary of your life insurance, let them know. Neglecting to make them aware of the policy, with which insurer it is held and how to claim it might mean they never actually benefit. All your diligent premiums may just go to waste.
Mistakes – Naming a single beneficiary
Naming just one beneficiary, say your spouse, is a huge gamble. What if your spouse, God forbid, dies before you? What if you get divorced and you forget to update the beneficiary on the policy? Or imagine a scenario where you and your spouse die at the same time. Who will the payout on your policy then go to? eventually, if unclaimed, the money will go to settling any debts you may have had. Any heirs left behind may face a long wait before they can access the money.
Mistakes – No guidelines for young beneficiaries
A number of life insurance policyholders leave a fortune to beneficiaries fresh out of their teens or just entering their 20s. With no one to guide them, chances of them misusing the funds are very high. It is therefore prudent to channel the money into a trust fund to be released only after the beneficiary attains a certain age.
Clash between will and life insurance
Never assume that what you state in your will overrules what your life insurance says. The policy is a binding contract and has to be fulfilled before your will is looked at.
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All info was correct at time of publishing