11 common mistakes people make when choosing a life insurance beneficiary

Be specific when naming your beneficiaries, listing their names, social security numbers, addresses, etc. When naming multiple beneficiaries, decide if you want the money to be divided “per Stirpes,” meaning by branch of the family, or just per person.4. Assuming the beneficiary is in your will, you assume that he or she will also inherit the proceeds of the life insurance policy directly

When it comes to estate planning, people generally rely on a written will to pass on their assets to their heirs. Unfortunately, a will cannot allow the proceeds of your insurance policy to pass directly to the people you wish. A will must first go through probate, which is an expensive and lengthy process. It can take years before the assets are distributed to your heirs.5. The insured and the beneficiary are not the same person

Normally, life insurance death benefits are usually tax-free. However, if your life insurance policy is owned by one person, another is the named insured, but a third person is the beneficiary, then the death benefit may be considered a taxable gift.

For example, if you buy a life insurance policy and the insured is your spouse, but the beneficiary is your children, then in fact, if the amount of this life insurance policy exceeds the federal tax limit, it will be taxable.6. Beneficiaries may become ineligible for government benefits

Under federal law, anyone who receives a gift or inheritance of more than $2,000 is ineligible for Supplemental Security Income and Medicaid. Therefore, you need to carefully consider the various situations so that the beneficiary does not lose money for other insurance. You can work with an attorney to set up a special needs trust and name the trust as a beneficiary.7. Falling into the tax trap

Death benefits from life insurance policies are usually tax-free. But if the policyholder, the insured, and the beneficiary are three different people, then the death benefit can be considered a taxable gift to the beneficiary.

For example, if a wife owns her husband’s life insurance policy and names her adult daughter as the beneficiary, the wife is actually creating a policy gift with income for her daughter. If the amount of the gift exceeds the federal limit, the person making the gift, the mother, will be taxed.8. Forgetting to renew your policy

Generally speaking, it’s a good idea to review your policy every three years and after major life events (such as marriage, childbirth or divorce) to see if there are any changes that need to be made.9. Failure to communicate clearly with the policy beneficiary in a timely manner