The beneficiary designation on a life insurance policy is easy for clients to overlook. It’s also an easy way for a well-designed plan to go off track through incorrect assumptions, inadvertent choices, or infrequent reviews.
Spending a few minutes going over beneficiary designations during an annual policy review can uncover costly mistakes and help ensure the policy still reflects the client’s wishes—both of which reinforce your value with very little effort. Consider these five common missteps during your next client review.
1. Assuming the Will Controls the Policy
Many policyholders believe that their will or living trust governs all forms of asset distribution. That’s correct for many assets, but one of the benefits of life insurance is that the proceeds pass directly to the named beneficiary without going through probate.
If a client updates their estate plan to leave everything to a surviving spouse, but the policy names an adult child from a prior relationship as the primary beneficiary, that child still receives the death benefit. Attorneys don’t always review beneficiary designations, and carriers don’t remind clients to update them. That creates an opportunity for producers to provide valuable guidance.
Annual Review Question: Have you updated your will or trust since we last reviewed this policy?
2. Never Revisiting Beneficiary Designations
A beneficiary form is a snapshot of the client’s life at one point in time. Families change, businesses dissolve, and people pass away, but the form does not update itself.
Divorce, births, deaths, business changes, and other life events can quickly make a beneficiary designation outdated. While many states automatically revoke an ex-spouse’s beneficiary status after divorce, employer-sponsored group coverage governed by ERISA generally follows the beneficiary form on file regardless of state law.
When a client doesn’t think to update their beneficiary designations after life changes, they often end up with scenarios like the following:
• A primary beneficiary predeceases the insured and no contingent beneficiary is named
• Former business co-owners are still named as beneficiaries under dissolved buy-sell agreements
• A minor is named as a beneficiary
Annual Review Question: Has anything changed in your family, business, or estate plan that might affect who you’ve named as a beneficiary?
3. Naming a Minor Child Directly
Naming a child as a beneficiary is intuitive, but many people don’t realize that life insurance carriers can’t distribute proceeds directly to a minor.
If a client dies leaving a minor beneficiary, a court must appoint a financial guardian or conservator to receive and manage the funds until the child turns 18—a time-consuming and expensive process. Upon reaching adulthood, the child generally receives the proceeds outright, regardless of maturity or financial readiness. A trust or Uniform Transfers to Minors Act (UTMA) custodianship can provide greater control.
Annual Review Question: If something happened to you today, is everyone you’ve named legally able to receive the proceeds?
4. Naming the Estate as Beneficiary
Proceeds end up payable to the estate either because the client named it directly or the primary beneficiary predeceased them with no contingent beneficiary in place. Proceeds paid to the estate go through probate, lose privacy, and may be exposed to creditors. When a client wants more control over distributions, naming a trust is often the better choice—especially to protect minor children, address blended family dynamics, shield assets, or preserve benefits for a beneficiary with special needs.
Annual Review Question: Have you addressed your planning goals by naming a specific person, trust, or charity as both the primary and contingent beneficiary?
5. Overlooking an ILIT
For clients using an irrevocable life insurance trust (ILIT) to keep policy proceeds out of their taxable estate, the beneficiary designation must align with the trust.
If the ILIT owns the policy but the beneficiary form names the insured’s estate or individual family members directly, the proceeds may be pulled back into the gross taxable estate. When a policy resides in an ILIT, it is important to confirm that the trustee is correctly named as the beneficiary.
Annual Review Question: If this policy is connected to an ILIT, does the beneficiary designation still match the trust documents?
Guiding the Conversation
Reviewing beneficiary designations doesn’t require a separate appointment. It can be a natural part of every annual policy review—one that often uncovers issues your clients didn’t even realize existed.
In just a few minutes, you can ask:
• When did you last look at who will receive the policy proceeds?
• Has anything changed in your family or your estate plan since then?
• Have you named a contingent beneficiary?
These brief conversations can prevent significant problems while reinforcing your role as a trusted financial professional.
