Choosing who will receive your assets or payment (called a “death benefit”) from your life insurance policies is a decision you should consider carefully, because a beneficiary designation cannot be changed or corrected after you is gone
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It is important to keep your beneficiary designations up to date as your life changes (marriage, children, divorce, etc.). Here’s some basic information about beneficiaries that can help.
Reading: What is a beneficiary for insurance
what is a beneficiary?
A beneficiary is the person or entity that you legally designate to receive the benefits of your financial products.
For life insurance coverage, that’s the death benefit your policy will pay if you die. for retirement or investment accounts, that’s the balance of your assets in those accounts.
primary and contingent beneficiaries
There are two types of beneficiaries: primary and contingent.
A primary beneficiary is the person (or persons) first to receive the death benefit from your life insurance policy, usually your spouse, children, or other family members.
In the event that your primary beneficiary dies before or at the same time as you, most policies also allow you to name at least one backup beneficiary, called a “secondary” or “contingent” beneficiary. if all primary beneficiaries are deceased, secondary beneficiaries receive the death benefit.
why do I need to name a beneficiary?
Many financial products, including life insurance benefits, are generally not governed by your will, so the only way to ensure your policy benefits are distributed the way you want is to make sure you have designated one beneficiary for all your policies. and accounts.
While you’re not required to name a beneficiary, it’s often the reason people buy life insurance in the first place: to provide a benefit to the people they care about. and your other assets may also provide a benefit to people you care about when you die.
what happens if I don’t name a beneficiary?
If you do not designate a beneficiary, it may be unclear who is entitled to the funds, which may delay benefit payment.
For retirement accounts such as 401(k), if you die without a beneficiary being named, your assets will likely be held in probate, a legal process in which a court must resolve your financial situation and determine how to distribute your assets. .
Most life insurance policies have a default payment order if you don’t name a beneficiary. For many individual policies, the death benefit will be paid to the policyholder if he is different from the insured person and is still alive; otherwise, it will be paid to the holder’s estate. For group insurance policies, the order usually starts with your spouse, then your children, then your parents, and finally your estate.
If a default order is not specified in your policy, the payment may be paid to your estate or may also be withheld at the estate.
In either case, the probate process can be long and complicated, and it can take years before your loved ones have access to your assets, which can be avoided by designating them as beneficiaries.
how to name a beneficiary
Most financial services companies provide a form or website for you to designate your beneficiary so they have it on file with your other account or policy information.
If you have life insurance or retirement accounts through your employer, they may keep your beneficiaries on file for all of your employee benefits: life insurance, retirement plan, profit sharing plan, or other benefits.
If you have investments, retirement accounts, or life insurance through a financial professional, check with them to make sure you have beneficiaries on file.
what information should I provide?
When naming your beneficiary, be specific. most beneficiary designations will require you to provide the full legal name of a person and their relationship to you (spouse, child, mother, etc.).
Some beneficiary designations also include information such as mailing address, email address, telephone number, date of birth, and social security number.
providing as much information as possible will help financial services or the insurance company verify and locate your beneficiaries, if necessary, making it easier and faster for them to pay your benefits. Your loved ones may need access to those funds right away for their final expenses, particularly life insurance benefits.
Can anyone be named as beneficiary?
Your beneficiary can be an individual, a charity, a trust, or your estate.
Almost anyone can be named as a beneficiary, although your state of residence or the provider of your benefits may restrict who you can name as a beneficiary.
Be sure to research the laws in your state before naming your beneficiary. If you are a resident of certain states, you may need to list your spouse as your primary beneficiary and designate them to receive at least 50 percent of the benefit. in some states, you can name someone else with your spouse’s written permission.
immediate family as beneficiaries
Anyone who will suffer financially from your loss is likely your first choice beneficiary. Generally, you can split the benefit among multiple beneficiaries as long as the total percentage of income equals 100 percent.
Some people name a trusted adult (their spouse, for example) and trust their judgment to consider giving money for other family members or loved ones.
appointment of minors as beneficiaries
Children under the age of 18 may be designated as primary or contingent beneficiaries. however, if you die while they are still minors, the proceeds can be sent on your behalf to the legal guardian of the minor child’s estate.
Another common solution for making accommodations for children is through the creation of a trust. in that case, you can name the trust as beneficiary.
Whatever arrangement you choose, minor children may not be able to access your life insurance assets or proceeds until they reach the legal age of consent; therefore, if you want the payment to be used for your benefit while they are still children, you may want to set up a trust or custody agreement. Talk to an attorney to help you choose the best vehicle for your situation.
special needs and other lifetime dependents as beneficiaries
It would seem logical to name someone who will need financial support throughout their lives as your beneficiary, but doing so could make them ineligible for government assistance, which could mean a significant loss of financial support for them.
Establishing a special needs trust and naming the trust as beneficiary is a way to channel your assets or life insurance death benefit to someone with special needs without triggering laws that may work against you. Consult an attorney who specializes in estate planning to learn more about your options.
naming charities or organizations as recipients
many people name charities and other cause-related organizations as recipients.
If you have a nonprofit organization you’re passionate about, you can name it as a primary or contingent beneficiary to receive all or a percentage of its assets or life insurance payout. doing so can be a powerful way to leave a legacy.1
can you change the beneficiary?
In most cases, you can change the named beneficiaries on a life insurance policy or other financial account at any time.
Switching beneficiaries is usually easy to do – the challenge is often remembering how to do it. contact your employer, financial professional, or financial services company to find out how.
when to update your payees
Beneficiary changes are often overlooked after a divorce, remarriage, or after the death of a loved one who may be listed as one of your beneficiaries.
divorce can revoke a designated spouse’s right to receive a benefit in some jurisdictions, so you may need to re-designate with an updated relationship (“spouse” to “ex-spouse”) if you want the designation remain in force.
An easy way to remember to keep your beneficiaries up to date is to use your employer’s annual benefits enrollment to review your account details and insurance policies.
If you don’t have benefits through your employer, set a date you’ll remember each year (May Day, Labor Day, your birthday) and spend ten minutes reviewing your bills and policies.
special circumstances for the change of beneficiaries
In some circumstances, such as in specific terms of a divorce or if you made what is called an “irrevocable designation,” you may not be able to change or name a new beneficiary without obtaining the consent of your current beneficiary.
Similarly, if you transferred ownership of a life insurance policy or account to someone else, you no longer own it, so you can’t change the beneficiary.
Usually you, your financial professional, or your attorney will know if any of these apply to you.
can the wrong person receive your benefits?
If you don’t keep your beneficiaries up to date or make a mistake documenting them, someone you don’t mean to can receive your assets or policy proceeds. That’s why it’s so important to carefully designate and remember to update beneficiaries.
If you are concerned about making a mistake in naming your beneficiaries, consult a financial professional or attorney to make sure your intentions are carried out the way you want.