Introduction
Life insurance is designed to provide financial security and peace of mind. However, neglecting to review your policies and beneficiary designations can lead to unintended consequences. Below are 12 common mistakes you can avoid to ensure your life insurance benefits reflect your current wishes and provide the protection your loved ones deserve.
1. Unintentionally Excluding a Child or Grandchild
Families grow and change, and failing to update your beneficiary list may unintentionally exclude new family members. Regularly reviewing your policy ensures it reflects your current family structure.
2. Including Someone You Want to Exclude
Life events such as divorces or estrangements may change your preferences. Update your policy to exclude individuals like former spouses or business partners from outdated relationships.
3. Making Your Estate the Beneficiary
Naming your estate as the beneficiary can subject the payout to probate taxes and make your estate details public. Designating specific beneficiaries helps maintain privacy and avoid unnecessary taxes.
4. Not Providing a Trustee for Minor Children
Without a designated trustee, the government may intervene to manage the funds for minor children. This can create unnecessary complications. Assigning a trusted individual ensures the funds are handled as you intended.
5. Overlooking Special Needs Children
Children with special needs may require additional care and resources. Including provisions in your policy can help provide for their long-term needs without compromising government assistance eligibility.
6. Designating Dollar Amounts Instead of Percentages
Allocating fixed dollar amounts to beneficiaries can cause delays and issues if dividends or policy loans alter the policy’s total value. Instead, assign percentages to ensure proportional distribution.
7. Not Naming a Contingent Beneficiary
If your primary beneficiary predeceases you, the proceeds may revert to your estate and become taxable. Naming a contingent beneficiary provides a backup plan.
8. Not Using Settlement Options
A large lump sum may be overwhelming for some beneficiaries. You can control how and when the proceeds are distributed, ensuring responsible use of the funds.
9. Ignoring Beneficiaries on Disability Policies
Some disability insurance policies offer death benefits. Forgetting to assign beneficiaries to these accounts can leave important dependents unsupported during challenging times.
10. Excluding Charitable Causes
Directing a portion of your life insurance to a charity can leave a lasting legacy while offering tax benefits to your estate. Review your policy to incorporate your philanthropic goals.
11. Inconsistent Designations Across Policies and Wills
Discrepancies between your will and insurance policies can create confusion and legal challenges. Ensure alignment between all documents to avoid delays and disputes.
12. Not Keeping a Record of Beneficiaries and Values
Maintaining a detailed record of your policies, beneficiary designations, and their values helps avoid confusion and ensures all proceeds are distributed as planned.
Conclusion
Avoiding these common mistakes starts with a simple yet crucial step: reviewing your life insurance policies and beneficiary designations annually. Life circumstances can change, and updating your policies ensures your decisions reflect your current wishes. By working closely with an advisor, you can safeguard your financial legacy and provide the support your loved ones need when they need it most.
To learn more about reviewing your policies or understanding your life insurance options, connect with an advisor.
This article is written for educational purposes.
Should you have any inquiries, please do not hesitate to contact us at (905) 836-8755, via email at [email protected], or by visiting our website at www.taxpartners.ca.
Tax Partners has been operational since 1981 and is recognized as one of the leading tax and accounting firms in North America. Contact us today for a FREE initial consultation appointment.
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