People often feel uncomfortable when it comes to discussing life insurance. This is certainly understandable, but it's worth considering the specifics of your life insurance policy. Naming your beneficiary is one of the most important steps, but some common mistakes are frequently made. However, they can be easily avoided with a little planning.
1. Naming a Minor
This is one of the easiest errors to make when naming a beneficiary. Parents want to ensure that their children are taken care of, so children are often chosen as beneficiaries. According to state law in California, a minor is anyone under the age of 18. If the beneficiary is under 18, the person can't access life insurance benefits.
There are ways around this. One option is to create a trust fund that will receive the life insurance proceeds. Another way is to choose a custodian. A custodianship can be established with your life insurance company, or you could select a custodian who will be responsible for the assets until your child is no longer a minor.
2. Lack of Information
Does your beneficiary know that he or she is the beneficiary? This might seem like a strange question, but it's surprisingly common for people not to know. Discussing life insurance is difficult. Death is a sensitive subject, and people may want to avoid talking about it. When it comes to life insurance, you have to engage in the conversation. It's essential that your beneficiary is informed and understands the process.
3. Updating Details
When a life insurance policy is purchased, you have to provide a lot of information. Over the years, this information changes. Phone numbers, addresses, and other specifics will need to be updated through the years. This may seem like a small issue, but it's a common oversight. As a rule, it's a good idea to review your life insurance information once a year or even every other year. Provided that the information is kept current, you should be in good shape.
As you update the details, you may discover that the person named as your beneficiary is outdated, as well. Remember that if you named your former spouse, he or she would receive the life insurance benefits. If you've remarried or had a child, you might need to update the beneficiary and any appropriate contact information.
Life insurance is generally exempt from federal and state taxes, but this isn't always the case. Sometimes life insurance benefits are accidentally made taxable. This is easy to correct, but you should review your policy to make certain it isn't taxable. The life insurance may constitute a "gift" and be subject to a gift tax if the owner and insured are not the same people. As long as the owner and insured are the same people, this shouldn't be an issue.
5. Will and Policy
Naming a beneficiary in your will doesn't make them the beneficiary of your insurance policy. Your will doesn't automatically override your life insurance policy, although this is something people may mistakenly assume. You actually have to change the name of the beneficiary listed. As long as your will and your insurance align, you should be able to avoid any contradictions.
Depending on your beneficiary, you may also want to consider how the life insurance benefits will impact any government assistance being received. If you'd like to learn more, feel free to contact California Brokerage Associates at 619-283-9999. Life insurance in San Diego, CA, is a tricky and sensitive issue. It's always good to have help.