When you have a life insurance policy or retirement account, it’s important that you choose a beneficiary—or the person or entity who gets your assets after you die. It may seem like a straightforward choice, but there can be some curveballs, so it pays to know what you’re doing.
Here are some strategies to make sure you have your bases covered:
Name a beneficiary
First and most basically, make sure you name a beneficiary at all. Sometimes individuals forget to name beneficiaries for group life insurance and 401(k) plans because of the do-it-yourself websites that employers now use, says Chris Cooper, a financial planner in San Diego.
Beneficiaries can be named on life insurance policies, 401(k)s, 403(b)s, 457s, IRAs, 529 plans and sometimes bank accounts.
Understand what’s required
Generally, you can choose whomever you want as a beneficiary of an account—except when it comes to your 401(k). In many cases, if you want to name someone other than your spouse, they may need to sign a consent form allowing you to do so. This may also be true of your life insurance, where you may be obligated to name your spouse before anyone else.
Make sure you choose a contingent.
You’re usually able to choose a secondary or contingent beneficiary—someone or a group of someones who would receive your assets if the primary beneficiary has died. Leaving this blank means if your primary falls through or dies first, probate court will determine how your assets are distributed.
Update everything after a major life change
Big life events affect a lot of things, and it’s always worth reviewing your beneficiaries after you’ve gotten married, divorced, had or adopted a child, or lost a spouse. If you’re not careful, you may find that you’d named your parents as a beneficiary when you were a young 20-something, and now you’re married. Or you named your spouse—who’s now your ex. Beneficiaries on your accounts trump your will, so take the time to revisit designations on insurance policies and retirement accounts.
Catherine Hodder, an estate planning attorney and author of Estate Planning for the Sandwich Generation, recalls a client who had a small money market account. When he opened it, he was living with a long-term girlfriend and made her the beneficiary—and she was still the beneficiary 10 years later when he was married to someone else. It pays to double check after your relationships change.
Avoid naming a minor
It may seem natural to leave something like life insurance to your children—but many insurers won’t give a death benefit to a minor, which creates a problem. The best approach is to leave life insurance proceeds to your spouse, who can then take care of your children. In the event that you both die, things get more complicated. It may be prudent to talk to your estate attorney about a trust that can hold the life insurance benefit—and a trustee who would manage the funds—until your children come of age. There are also different rules for special needs minors, who may require a special needs trust.
Be specific—and consistent.
Some policies and accounts allow you to designate that your assets be divided equally among “your children.” That may seem straightforward, but it gets stickier if there are any stepchildren or children from a previous marriage in the equation. If you’re naming a nonprofit as beneficiary, include their address and tax ID to prevent confusion.
And be sure to use the same name for beneficiaries throughout, advises Ellie Thompson, CEO of financial consulting firm Money Therapy. For instance, if your daughter’s name is Eleanor but goes by Ella, and you have two forms with both names present, that can slow a beneficiary payout.
Think through the potential effect of the windfall.
Not everyone is going to handle your $500,000 life insurance payout with grace and self-control. And sometimes people don’t behave the way you’d hope they would—and you won’t be here to help them.
Patrick Simasko, an elder law attorney and wealth preservation specialist, recalls a grandfather who listed his 20-year-old grandson as a beneficiary for his 401(k) plan worth $750,000. The grandson received the money and squandered it--he coudln't handle that much wealth responsibly.
In another case, Simasko remembers, a husband divorced his wife and made his brother his life insurance beneficiary, since he couldn't leave his benefit to his 2-year-old. A year later, he died, and his brother collected the $500,000 and moved to Canada—leaving the man’s two-year-old son with nothing. If you have specific wishes or concerns, talk to an estate planner.
Be aware of the big picture
If you’ve named different beneficiaries for different accounts—one account for each child, for instance—think about the total amount that each will receive. If the proceeds will be quite different, it can create real stress and fighting among loved ones. You may be better off splitting everything equally among the people you’re designating.
In the end, choosing someone to receive what you’re leaving behind can be an emotional decision, and it’s not one to be taken lightly. Take some time to think through the implications and consequences of your choices—and make sure to update them over time.
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