Certain accounts ask you to name a beneficiary, such as life insurance policies, pension plans, and retirement accounts. Upon your death, proceeds from these accounts will typically go directly to the beneficiaries and bypass probate, the slow and expensive legal process of distributing your assets after you pass, which helps your beneficiaries avoid some red tape.
What to Consider When Choosing a Beneficiary
Choosing a beneficiary is a very personal decision, and different for everyone. In some cases, people want to use a death benefit to protect their loved ones, and others might see it more as a financial transaction. Here are some tips to keep in mind when you are selecting your beneficiary.
Insurable Interest. The person or entity named as a beneficiary has to have an insurable interest in the insured person. While the insured generally has the right to name any beneficiary, there must still be a legitimate financial interest between the parties. In most cases, beneficiaries rely on the insured for financial support, such as the spouse or dependent children, so there is an apparent financial interest and purpose of insurance between the parties.
Age. Most insurance companies, pension plans, and retirement accounts will not pay benefits to someone under age 18. A better option is to create a trust for the minor and name a trustee to manage the account until the child reaches the age you specify in the trust.
Ability to manage money. If your beneficiary is not able to manage money, name a trustee to invest and disburse funds on his or her behalf.
Contingency. Name a secondary beneficiary so that if your first beneficiary dies before you, the account proceeds pass directly to the secondary beneficiary without probate.
Options. Your beneficiary can be a spouse, child, or other individual(s); a trust; a charity or organization. If you don›t specify a beneficiary, your assets will go into your estate and be distributed according to your will.
Consistency. If you have a will, it typically does not override the beneficiary designations on your life insurance policy or retirement account. For example, if you name your daughter beneficiary of your IRA, but your son is named as beneficiary of your IRA in your will, your daughter’s beneficiary designation will take precedence and she will receive the asset. Be sure you are consistent when selecting beneficiaries in both your financial plans and estate plan. Consult an attorney to provide legal guidance for these types of issues.
Don’t ‘set it and forget it’
Regardless of what you’ve specified in your will, assets that have beneficiary designations will pass based on those designations, and not how they’re set out in your will. It’s rarely recommended to name your estate as a beneficiary, since doing so means those assets may be subject to probate.
Because so many things change throughout life, review your beneficiary designations every few years—and always after a life event such as a marriage, the birth of a child, adoption, divorce, remarriage, or death—to make sure they’re current. Otherwise, you may risk leaving the proceeds to an ex-spouse or someone who has died before you.