Investing in life insurance is a foundational part of your overall estate plan, and when done right, it can be the primary way to ensure your loved ones will be taken care of after you are gone. However, when naming your policy’s beneficiaries, several mistakes can lead to unexpected consequences for the people you’re trying to protect and support.

The following four mistakes are among the most common we see clients make when selecting life insurance beneficiaries. If you’ve made any of these errors, contact us immediately, so we can review your policy and beneficiary designations to ensure the proceeds will provide the maximum benefit for your loved ones as a part of your overall estate plan.

1.    Failing to Name a Beneficiary

Although it seems to go against common sense and the entire point of getting life insurance, whether intentional or not, more people than you’d imagine fail to name a beneficiary on their life insurance policy or inadvertently name their “estate.” What typically happens is that the insurance agent initially fills out the application and uses general language or leaves the beneficiary designation blank, expecting the client to make a final decision and to complete the form with an identified beneficiary. Unknowingly, the documents are signed and the beneficiaries that were intended to be listed, were not. If you fail to name a beneficiary or name your “estate,” the insurance proceeds must go through the court process known as probate before they can be paid to your family.

During probate, a judge will determine who gets your insurance death benefits. This process can tie the benefits up in court for months or even years, depending on who the beneficiaries of your estate are under the law. Moreover, probate opens up the proceeds to creditors, which can seriously deplete—or even totally wipe out—the funds meant for your family in their time of need.

To keep your insurance proceeds out of court, make sure you designate—at the very least— one primary adult beneficiary. You should also name a contingent (alternate) beneficiary in case something happens to your primary choice, or they’re with you during a fatal accident. Personally, we recommend that our clients name more than one contingent beneficiary for maximum protection and as a fail-safe just in case.

Ideally, we often recommend that the alternate beneficiary of your life insurance (after your spouse), is the Trustee of a well-considered and thoughtful Trust Agreement to provide maximum benefit and protection for your heirs.

2.   Forgetting To Update Beneficiaries

While failing to name any beneficiary is a huge mistake, not keeping your beneficiary designations up to date can be even worse. We’ve seen far too many people in a second (or third) marriage fail to remove their ex-spouse as beneficiary, which then led to conflict, litigation and ultimately, often leaves their current spouse with nothing after they’re gone. The other common thing we see is that someone who has died is still the named beneficiary on a life insurance policy, which wasn’t updated. 

To prevent this, you should review your beneficiary designations annually as part of an overall review of your estate plan and immediately update your beneficiaries upon events like divorce, deaths, and births. When you work with our office to create or review your plan, we have built-in systems to ensure your beneficiary designations (along with all other documents and decisions in your plan) are regularly reviewed and updated.

3.  Naming A Minor (Or Their Guardian) As Beneficiary

Even more common, is that we see people name a minor child as a beneficiary of their life insurance, which is never a good idea. Minor children cannot receive insurance benefits until they reach the age of maturity—which can be as old as 21 in some states. In the event a minor is listed as a beneficiary, the proceeds of your insurance will be distributed to a court-appointed custodian, who will manage the funds (often for pricey fee) until the child reaches the age of maturity. If your spouse or a trusted family member is appointed, they will still have to provide an accounting of how the money was spent to the court annually and hire a lawyer to assist them every year. After your child becomes an “adult” (typically 18 or 21 depending on your state law), all the life insurance proceeds are distributed outright and unprotected to your child.

What most commonly occurs in these cases is that a child’s living parent will file a petition in court asking to be appointed guardian of the child’s “estate.” Contrary to popular belief, there is no guarantee that a parent will be appointed because they will have to qualify and pay for a bond. Often a court may deem a parent unsuitable (if they have poor credit, for example), and instead appoint a paid fiduciary to control the funds.

Rather than naming a minor as a beneficiary, you may consider naming the person you have chosen as guardian of your child as an alternate or your second option after your spouse. But that’s not the right answer either. In that case, all insurance would pay outright to the named guardian and could be used in any way they choose, or even be at risk of being taken in a divorce or by their own creditors.

Instead, the right answer is to set up a trust and if you’re married, to name the trust as the alternate beneficiary to receive the insurance proceeds after your spouse, who is named the primary beneficiary. In your trust, you’ll name a trustee who will hold and distribute the funds to your minor child at the age(s) and manner that you want them to receive it. I can’t imagine an 18 or 21 year old that would invest their inheritance and your life savings in the most responsible manner. To maximize the benefit of forming a trust, many of our clients want to add as much asset protection for their spouse and children as they possible can. That’s why many of our clients choose to create an ongoing trust for their children after their death, which can protect their inheritance from their children’s creditors, bankruptcy, lawsuits, or divorce indefinitely.

4. Naming An Individual with Special Needs As Beneficiary

Although a loved one with special needs is likely who you’d want to name as beneficiary of your life insurance policy to ensure they are taken care of financially, but doing so can have tragic consequences. Leaving insurance directly to someone with special needs could disqualify them from receiving much-needed government benefits.

Rather than naming someone with special needs as a beneficiary, you should create a “special needs trust” to receive the insurance proceeds. This way, the money won’t go directly to the beneficiary upon your death. Instead, it would be managed by the trustee you name and dispersed according to the trust’s terms without affecting their eligibility for government benefits.



The rules governing special needs trusts are complicated and vary greatly from state to state, so if you have a child with special needs, it’s important that you meet with a qualified attorney to discuss your options.

Eliminate Future Problems Now

While naming life insurance beneficiaries might seem simple, if you’re not careful, you can create major problems for your loved ones if it’s not done correctly. If you have any questions or want to ensure your life insurance beneficiary designations have been done properly, please reach out and book an appointment with our office. We can educate and support you to ensure your insurance proceeds provide the maximum benefit for your beneficiaries without negatively affecting them. Schedule a Family Wealth & Legacy Strategy Session to get started.

This article is a service of Family Wealth & Legacy Legal Solutions (FWLLS). We do not just draft documents; we ensure you make educated, informed and empowered decisions for yourself and the people you love. That's why we offer a Family Wealth & Legacy Strategy Session™, during which you will get educated and begin to prepare to avoid life’s most common legal problems and make the best possible choices for the people you love. You can begin by calling our office today to schedule a Family Wealth & Legacy Strategy Session and mention this article to find out how to get this $750 session at a significantly discounted rate, or even for free.