Beneficiary Designation Basics

“Oh, I’ll just put down my nephew as the beneficiary of my life insurance policy at work.” Looking back, it was almost an afterthought.

That was 10 years ago on your first day of new employee orientation, when you were right out of school. You now have a spouse, one child and another on the way. You have not thought about updating the beneficiary designation in light of your changed circumstances.

Beneficiary designations are important and can have serious consequences. On the one hand, the lump sum payment of life insurance to your nephew may be just enough to fuel his last drug and alcohol bender in Vegas. At the same time, your widowed spouse and minor children will default on the mortgage and struggle to make ends meet. Unfortunately, this is not uncommon.

Naming Beneficiaries

Make sure that your primary and secondary beneficiary designations are up-to-date and are coordinated with your overall estate plan. Do not forget to designate a secondary beneficiary, in case your primary beneficiary fails to survive you. Otherwise, the proceeds will become subject to probate. In most instances, this is best avoided, unless done by design as part of a comprehensive estate plan.

Did you know that designating a beneficiary for your life insurance policy has absolutely no effect on your retirement plan designation? Each of your life insurance policies and retirement accounts requires a separate beneficiary designation form. This provides considerable flexibility. For example, you could have the same primary (your spouse) and the same secondary (your children) designated on each. Alternatively, you could designate any other combination of family, friends or charities.

In addition, if you have more than one primary or secondary beneficiary, you will need to determine the percentage of the proceeds each is to receive. For example, if your two sons are your primary beneficiaries, you might split the proceeds at 50 percent to each. You should also keep in mind that if your two sons are minors, policy proceeds and plan distributions typically will not transfer directly to them, until legal adulthood. The court will, therefore, need to appoint an adult to oversee the proceeds until each son respectively reaches age 18 or 21 (depending on your state).

Your Will or Trust?

Did you know that beneficiary designations pass independent of any distributions directed under your estate planning documents like a Last Will and Testament or a Revocable Living Trust? In our example above, the nephew would inherit the life insurance proceeds, even though a Last Will and Testament states that all assets are to be distributed to the surviving spouse. If you have minor children or loved ones with special needs, then you may want to designate your Last Will and Testament or Revocable Living Trust as the beneficiary. In that way, the proceeds will be administered and distributed according to your instructions.

Keep Them Up-to-Date

As you can see, it is imperative that you keep your beneficiary designations up-to-date and aligned with your overall estate planning objectives. A good rule of thumb is to review your designated beneficiaries and your estate planning legal documents at least every two years or after any major life event, like a marriage, divorce, or the birth or adoption of a child.

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Written by Legacy Planning Law Group

Legacy Planning Law Group is dedicated to working with individuals and families to help protect the assets they have built throughout their life, and make everything simpler for families who have lost a loved one. We help thoughtful people achieve the peace of mind that comes with planning their personal legacy and passing on family harmony.