Common Life Insurance Mistakes in Estate Planning
With few exceptions, almost every client should have life insurance, just as everyone should
have an estate plan.
But simply having a policy - and a plan - is not enough. Both life insurance policies and estate
plans are prone to mistakes or oversights that can undermine their effectiveness. And those
mistakes or oversights can be compounded when life insurance is part of a client's estate plan.
Mistake #1: Not Having Enough Coverage
The need for life insurance in the United States grew to a record-high level in 2024, with 102
million adults saying they need - or need more - life insurance, according to an annual survey
from LIMRA and Life Happens, two nonprofit industry trade associations.1
Survey results from a prior year indicated that 44 percent of households would encounter major
financial difficulty within six months if the family lost its primary wage earner.2 Life insurance
coverage should be sufficient to sustain a household's current living standard. Household
spending varies by age group and tends to drop with age, but it does not consistently decline
until after age 65.3 Many households see a jump in spending at around age 55.4
Life insurance calculators can roughly estimate how much coverage is needed. However, there
is no substitute for a comprehensive review of a client's situation, insurance needs, and estate
planning goals by all the client's trusted advisors. By collaborating, we can make sure that our
mutual clients are getting the coverage they need to meet their unique situations and goals.
Mistake #2: Relying on Employer or Group Insurance
While group life insurance offered through work or a professional organization is often cheaper
than an individual policy, it may not provide enough coverage for most families. There is also
the risk that the policyholder will lose their policy if they quit their job, retire, are fired, or sever
ties with the sponsoring organization.
Clients should be encouraged to take advantage of a group insurance policy if offered but
cautioned not to rely on it exclusively. As part of your discussion with the clients, consider
asking them about the maximum death benefit of their group policy so you can determine the
coverage gap amount.
Mistake #3: Not Listing a Beneficiary
Life insurance policies with a designated beneficiary are not governed by a client's will (unless
the beneficiary is the policyholder's estate). It is up to the clients to name a policy beneficiary (or
beneficiaries) to whom they want to receive the death benefit.
If an individual policyholder does not name a beneficiary, the death benefit proceeds could
become part of the policyholder's estate - possibly subjecting the beneficiary to the delays and
expenses of probate court.
For group insurance policies with no named beneficiaries, the terms of the policy may include
an automatic beneficiary order, such as the policyholder's spouse, followed by children, parents,
and the estate. Not naming a beneficiary and relying on the terms of the life insurance policy
could result in the proceeds being distributed to the predetermined beneficiaries, which may not
be in line with the policyholder's estate planning goals. This is also true if the death benefits fall
to the policyholder's estate and the policyholder dies without a will. If the policyholder had a will
or a trust, the distribution of death benefits from the estate follows the plan established in their
estate plan.
As a practical note, we advise all clients to inform the people they designate as
beneficiaries of their life insurance policies and, ideally, give them contact information
for the claims department of the plan provider. Life insurance proceeds sometimes go
unclaimed because the family has no idea a policy exists.
Mistake #4: Naming a Minor Child or Special Needs Beneficiary
Life insurance death benefits can be a lifeline for minor children and special needs beneficiaries.
However, naming a minor or disabled beneficiary can work counter to the goal of providing them
with financial security.
Life insurance companies cannot pay death benefits directly to minor children. To avoid any
legal complications and delays that can arise from this obstacle, a client can name a trust with a
trusted adult, such as a spouse or partner, to act as the trustee of the trust, to manage the death
benefit for the child according to the client's wishes. The court may have to get involved if the
client names a minor child as a beneficiary.
Two main issues with naming a disabled or special needs beneficiary on a life insurance policy
are that they may not have the capacity to manage the funds responsibly, and the death benefit
amount could disqualify them from means-tested government assistance programs. A third party special needs trust can be created to hold insurance death benefits for those with disabilities. This type of trust will help the special needs beneficiary retain their public assistance
eligibility while covering expenses not covered by programs like Medicaid or Social Security.
Mistake #5: Not Updating Beneficiaries
Out-of-date beneficiary designations are a common - and potentially costly - life insurance
mistake.
Clients should update beneficiaries anytime there is a major life event, such as a marriage,
divorce, birth, or death. Remind them that the insurance beneficiary forms take precedence
over their will.
Some states have "revocation upon divorce" statutes that automatically revoke a spouse as a
beneficiary in the event of a divorce. In such states, contingent or successor beneficiaries
become primary beneficiaries automatically without the policyholder needing to update their
beneficiary form. But if the policy does not name a contingent beneficiary - or the successor
beneficiary has predeceased the policyholder - the insurance proceeds could pass to the estate
and go through probate, subjecting the proceeds to unnecessary and sometimes substantial
costs.
Both primary and secondary beneficiary designations should be reviewed every three to five
years to ensure a death benefit goes to the right person. Absent a major life event, the client
could just change their mind, for personal reasons, about who should benefit from the policy.
They might also decide to switch the beneficiary from an individual to a charity or a trust. Also,
there are times when insurance plan providers are bought by or merged with new plan providers
or when an employer may change the company that provides their group plan life insurance
policy. In these situations, the original beneficiary designations may be wiped out, requiring the
policyholder to designate their beneficiaries anew.
Changing a beneficiary designation is usually a simple process. Still, community property states
may require the policyholder to name their spouse as the primary beneficiary, designated to
receive at least 50 percent of the benefit. In these states, written spousal consent may be
required to name somebody other than the spouse as a beneficiary.
Enhance Your Advisory Services with Estate Planning
Our job as advisors is to remind clients that planning is not a one-time event. It is a continual
process that needs to be revisited and refined over the years.
It is no different for our practice area. The more we learn from each other, the more we can offer
cross-disciplinary services that address all aspects of our clients' futures.
Please contact us to set up a time to discuss specific estate planning strategies and how they
can fit into your current offerings.
MEREDITH | PC
4325 Windsor Centre Trail
Suite 400
Flower Mound Texas 75028
214-513-1013
This newsletter is for informational purposes only and is not intended to be construed as written advice about a Federal tax matter. Readers should consult with their own professional advisors to evaluate or pursue tax, accounting, financial, or legal planning strategies.
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