The Number One Life Insurance Mistake


Twenty-five years ago a young lady came into my office in tears and on the verge of a nervous breakdown. Her very successful salesman husband had recently passed away of a heart attack and while he left behind a $1 million life insurance policy, he also left her in financial peril because he made the number one life insurance mistake…he inadvertently made a poor choice with the beneficiary designation. In this case, he named his estate as the beneficiary. This might have been ok if he had a properly drawn will directing the insurance proceeds to his wife but, in this case, he had no will at all. Without a will, the laws of the state where you reside determines who will receive your assets. In this case it meant that one-half of the $1 million went outright to the wife, but the remaining one-half would go to their nine-year-old son. To complicate matters further, since the child was a minor the court appointed a conservator to oversee and protect the child’s money. This court-appointed attorney purchased CDs with the money and refused to allow either the income or principal to be used for the benefit of the child. So here’s this mother sitting across the desk from me with a big nice home which had a large mortgage and interest earnings of about $25,000 per year from her portion of the life insurance proceeds and she has expenses that significantly exceed her income. The end result was not pretty. She ended up selling the home and, since she had not worked for years, took a low paying job to help with expenses. All of this could have been avoided if her husband had simply named her as the beneficiary. Even worse, the son received over $750,000 when he turned nineteen! He wasn’t ready to handle that much money! This is just one example of how a careless mistake can create a tidal wave of financial repercussions.
Our initial review of policies for new clients suggests that these mistakes occur more than half of the time. Here are some other typical scenarios that we often run into:
  • Primary beneficiary is the spouse with ‘children’ named as the contingent beneficiary. Should the spouse predecease the insured, the children become the primary beneficiaries. If any of the children are minors, you have a similar situation as described in our story.
  • Primary beneficiary is the spouse with no contingent beneficiary where there are minor children. In this case, should the spouse predecease the insured, the effect is to make the insured’s estate the primary beneficiary.  The insurance proceeds would then be distributed according to the insured’s will, if he or she has one.
  • Primary beneficiary is an ex-spouse. Yep, this happens! A couple goes through a divorce and they forget to change the beneficiary on their personal life insurance or the group life through their employer.
  • Beneficiary is a person who is ill equipped to handle a large sum of money. Let’s face facts. Many people simply lack the experience to handle a large sum of money and would be best served by having the money directed to a trust for their benefit.
Use this column as a reminder to review all of your beneficiary designations, including retirement plans, as well as ownership of investment and bank accounts and property deeds. If you’re like half of the people, you’ll find a mistake that needs correcting.