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10 ways to screw up when picking life insurance beneficiaries





Naming who should get the life insurance money after you die sounds simple, but designating beneficiaries can get tricky.

Mistakes are common, financial advisers say -- and they can be heartbreaking and expensive.

When mistakes are made "you're not creating problems for you," says Keith Friedman, principal of FBO Strategies, an estate planning and insurance firm in Stamford, Conn. "You're creating problems for the people you leave behind."

Here are 10 life insurance beneficiary mistakes to avoid.

1. Naming a minor child

Life insurance companies won't pay the proceeds directly to minors. If you haven't created a trust or made any legal arrangements for someone to manage the money, the court will appoint a guardian, a costly process, to handle the proceeds until the child reaches 18 or 21, depending on the state.

Instead, you can leave the money for the child's benefit to a reliable adult; set up a trust to benefit the child and name the trust as the beneficiary of the policy; or name an adult custodian for the life insurance proceeds under the Uniform Transfers to Minor Act. Consult an estate attorney to decide the best course.

2. Making a dependent ineligible for government benefits

Naming a lifelong dependent, such as a child with special needs, as beneficiary puts the loved one at risk for losing eligibility for government assistance. Anyone who receives a gift or inheritance of more than $2,000 is disqualified for Supplemental Security Income and Medicaid, under federal law.

Work with an attorney to set up a special needs trust, and name the trust as beneficiary. A trustee you appoint will manage the money for the dependent's benefit.

Here's more on life insurance planning for parents of children with special needs.

3. Overlooking your spouse in a community-property state

Generally you can name anyone with whom you have a relationship as beneficiary, even a secret lover.

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