Do you remember the last time you bothered to check the beneficiary designations on your life insurance policy and financial accounts?
Naming beneficiaries is an easy way to ensure account funds and insurance policy death benefits are passed on to the people or organizations of your choosing when you die. However, it’s easy to forget to review those designations as time passes and changes in your life occur.
Without frequent checks and updates to beneficiaries, the unthinkable can happen. For example, your ex-wife could end up with all of the money in your retirement account, or only your first-born child gets an insurance payout when you die. In short, your money might end up in the wrong hands—or not make it to everyone you want to receive it.
That’s why it’s important to understand how to designate beneficiaries, why you should review those designations periodically and when to make changes.
Types of beneficiary designations
There are a variety of financial products and accounts that allow you to name beneficiaries. The proceeds from the products and funds from the accounts will pass directly to your beneficiaries when you die without going through probate, which is the legal process for settling estates.
Life insurance beneficiary
A life insurance beneficiary is the person (or people) you name to receive the death benefit from your policy. In addition to individuals, you can name a trust, charity or entity such as your business as a beneficiary. If you don’t name a beneficiary, the death benefit will be paid to your estate, and the amount will be divided among your heirs.
You can name both primary and contingent beneficiaries. The primary beneficiary is first in line, so to speak, to receive the death benefit. Contingent beneficiaries receive the death benefit if the primary beneficiary can’t be located or has already died. You have the option to name beneficiaries when you purchase a life insurance policy and can update them by contacting the insurance company or by logging onto your insurance account online to make changes.
Retirement account beneficiary
If you have an IRA, 401(k), 403(b) or other retirement account, you have the option to name primary and contingent beneficiaries to receive the funds in the account when you die. Your beneficiaries can be individuals, trusts, charities or other organizations. Be aware that federal regulations require the surviving spouse to be the primary beneficiary on a 401(k) or other employer-sponsored retirement plan, unless the spouse signs a waiver allowing you to name another primary beneficiary.
Typically, you’re given the opportunity to name beneficiaries when you open your account. If you don’t name a beneficiary, retirement funds typically go to the spouse or to the estate (to be distributed during probate) if there is no spouse.
A payable-on-death (POD) account is a designation offered by banks. It allows account holders to name beneficiaries who will receive funds in the account when the account holder dies.
The process is pretty simple. Typically, account holders just have to fill out a form with their bank to designate accounts as payable on death and to name beneficiaries. They maintain complete control of the accounts while they are living, and beneficiaries can receive funds by providing the bank with their identification and proof of death of the account holder.
A TOD account works like a POD account, except that it is a designation used for investment accounts other than retirement accounts. The Uniform Transfer on Death Security Registration Act allows people to designate beneficiaries to receive stocks, bonds and other securities without going through the probate process. All states except Louisiana and Texas have enacted this act.
To establish TOD accounts, account holders can fill out beneficiary forms with their investment companies. They maintain complete control of the securities until their death, at which time beneficiaries can provide proof of death to receive the securities and register them in their names.
More than half of the states, including California, Illinois and Texas, allow transfer-on-death deeds. These deeds allow property owners to name beneficiaries to inherit their property when they die without going through probate. If there is a mortgage, it will be transferred along with the property.
As with POD and TOD accounts, beneficiaries don’t have any legal right to the property until the property owner dies. Typically, they will have to take a few simple steps, including providing a death certificate, to claim the property.
What to consider when naming beneficiaries
When naming beneficiaries, consider who relies on you for financial support—a spouse or partner, children, grandchildren or other family members and friends. Naming these people as beneficiaries will ensure that your assets pass quickly to them when you die. You also can consider charitable causes or organizations you want to support, and name them as your beneficiaries.
If you have the option to name beneficiaries by relationship rather than name, this can be a better option because names can change over time. For example, you might get remarried or your children’s last names can change if they get married. So, consider designating beneficiaries as “the person I am married to at the time of death” and “my descendants.” Be aware, though, that designating “descendants” as beneficiaries includes blood relatives—your children and grandchildren—but not stepchildren.
Also, be aware that if minor children are named as beneficiaries, they might not be able to access your assets until they become adults. You’ll need to name a guardian for your children or create a trust and name a trustee to manage those funds.
This is why it’s important not just to rely on beneficiary designations to pass on your assets. You need an estate plan that includes a will, possibly a trust, power of attorney, healthcare power of attorney and advance directive. You also need to let family members know where your estate planning documents are located and whether they have been named beneficiaries so they’ll know to contact your insurer and financial institutions when the time comes. You can keep important estate planning documents, beneficiary designations and other financial documents secure and organized by storing them in a digital vault, such as the one provided by the Carefull financial safety service.
Why beneficiaries need to be updated
You should review and update your beneficiaries any time you experience a life event, such as a marriage or divorce, birth of a child, or death of a beneficiary. Other circumstances might also prompt you to update beneficiaries, such as a falling out with a person you’ve named as a beneficiary. If you don’t bother to update beneficiary designations after life events, your money could end up going to people you don’t want to receive it.
Be aware that beneficiary designations take precedence over directives in a will. For example, your will might state that your life insurance policy should be divided among your two children. However, you already designated your spouse as the beneficiary on the life insurance policy. Despite what the will says, the death benefit will be paid to your spouse.
However, if you establish a trust, you can name the trust as a life insurance or retirement account beneficiary. The language in the trust can then direct how the funds will be distributed.
If you don’t name a beneficiary for accounts, it could take a while for your family to get access to the funds in the accounts or from a life insurance policy. That’s because those funds will pass onto your estate (your property and assets after you die) and will have to be divided and distributed through the probate process, which can take several months or even years.
How to update account beneficiaries
It’s usually pretty easy to update your beneficiaries. You might have the option to log onto your life insurance account or financial accounts and make changes to your beneficiaries online. Otherwise, you might need to contact your financial institution by phone or in person to request a form to make the change.
The process isn’t so simple if you have an irrevocable beneficiary on your life insurance policy or any of your financial accounts. You can’t remove that beneficiary without that person’s consent. If the beneficiary doesn’t agree, you could end up in a legal battle to force a change in beneficiaries.
It’s important to name beneficiaries for life insurance policies and financial accounts to ensure that your assets pass quickly to your loved ones. It’s even more important to review and update beneficiaries if you experience changes in your life to ensure that your assets end up in the right hands.