01
Never Updating Beneficiaries After Major Life Changes
Beneficiary designations are often set at the time a policy is purchased or a 401(k) is opened, and then never revisited. Divorce, remarriage, the death of a named beneficiary, and estrangement can all make an old designation problematic. In some states, divorce automatically revokes a former spouse's beneficiary designation; in others, it does not.
A beneficiary designation review is a simple process that makes sense after any major life change: marriage, divorce, birth of a child, death of a named beneficiary, or significant change in family circumstances. See also: 5 Life Insurance Mistakes Families Make.
02
Naming a Minor Child Directly
Minors cannot legally receive a lump-sum life insurance benefit or retirement account distribution directly. If a minor is named as the beneficiary and the insured dies, a court will typically need to appoint a guardian of the property to manage the funds until the child reaches legal age. This process takes time, involves court costs, and places control in the hands of whoever the court appoints, which may not align with what the parent intended.
Common alternatives include naming a trust as beneficiary with provisions for minor beneficiaries, or using a custodial account structure under UTMA/UGMA. The right approach depends on the family's situation and is worth discussing with an estate planning attorney.
03
Not Naming a Contingent Beneficiary
A primary beneficiary receives the proceeds if they are alive when the insured dies. A contingent (secondary) beneficiary receives the proceeds if the primary is not alive. Without a contingent beneficiary, if the primary predeceases the insured or dies simultaneously in an accident, the benefit typically flows through the insured's estate, meaning probate.
Naming a contingent beneficiary is a simple step that's often skipped. It's the difference between a benefit transferring smoothly and efficiently versus going through a court process that can take months and reduce what beneficiaries ultimately receive.
04
Using “Estate” as the Beneficiary
Naming your estate as the beneficiary routes the life insurance proceeds or retirement account through probate, the legal process of settling an estate through the courts. Probate can be slow (months to years in complex cases), is a matter of public record, and incurs costs including attorney's fees and court fees.
Life insurance proceeds paid directly to a named individual beneficiary bypass probate entirely. That direct transfer is one of the key practical advantages of life insurance as an estate planning tool. Naming the estate eliminates this advantage.
05
Not Coordinating Across Accounts
401(k)s, IRAs, life insurance policies, and annuities each have their own independent beneficiary designations. These designations do not follow your will; they operate separately. Many people review beneficiaries on one account after a life event but forget to update others.
A complete beneficiary review means checking every account that has a beneficiary designation: all retirement accounts, life insurance policies, annuities, and any account with a transfer-on-death (TOD) or payable-on-death (POD) designation. A mismatch between accounts can direct significant assets in unintended directions.