Blitzed through your New Year’s resolutions already? I have a new one that often gets overlooked when getting ready for a new year: reviewing your beneficiary designations on all your investment accounts and insurance policies. Have you thought about what happens to your accounts and policies when you die? Most people haven’t!
When our wishes are not clearly laid out amongst beneficiaries it can make for a difficult situation. Add a large sum of money into the equation and things can get interesting real fast. This is where beneficiary management comes into play. It’s an important part of any financial strategy to ensure as best we can our wishes are carried out.
Plus, proper designations can supersede your will, help avoid probate, and dictate how assets are supposed to properly transfer after death. A good rule of thumb is to review beneficiary designations at least annually. Major life events though may create situations in which they need to be revisited more frequently (e.g. marriage, divorce, births, deaths, moves, adoptions, etc.).
Life Insurance Beneficiary Rules
This isn’t an exhaustive list, but some common accounts and policies that are going to hold beneficiary designations are the following:
- Qualified retirement plans like 401k’s, 403b’s, and 457’s
- Individual retirement accounts like IRA’s, Roth IRA’s, SEP IRA’s, and SIMPLE IRA’s
- Individual, joint, and custodial non-retirement investment accounts
- Insurance policies like life insurance, annuities, and long-term care
- Education accounts like 529 plans and Coverdell ESA’s
- Bank accounts like checking, savings, CD’s, money market, etc.
- Other employer provided benefits like money purchase plans, profit sharing plans, ESOP’s, non-qualified deferred compensation plans, etc.
Read More about life insurance and long-term care:
To start out, I’d recommend making a list of your accounts and determining if beneficiary listings are up to date. You could create a grid like the one below to help with this (add more rows as needed for your own situation).
|Account/Policy Type||Company/Custodian||Beneficiaries up to date? Yes or No|
Once you’ve identified your accounts and policies, whether they have current beneficiary designations or not, you can then start asking a series of questions to determine if any actions need to be taken. Such questions are as follows:
- Any accounts or policies without beneficiaries listed at all?
- Any accounts or policies with outdated information or incorrect people listed?
- Do we have both primary and contingent beneficiaries listed? Or just primary?
- Spouse listed as beneficiary? Non-spouse? Combination of the two?
- Any minors listed as beneficiary (either primary or contingent)?
- Is a trust listed as the beneficiary (either primary or contingent)?
- Are any beneficiaries to whom you may be concerned with their financial management of the assets they’d be receiving?
- Does your estate plan line up with your beneficiary designations? Or are there inconsistencies?
For any account or policy for which an answer to any of the questions above is yes, it likely means we need to dig a little deeper to determine if any changes need to be made. That being said, everyone’s situation is unique and there’s not a one size fits all when it comes to beneficiary listings. Rather than providing specific actionable steps in this post, I’m merely going to provide some comments in relation to each question as to help you determine if you should be chatting with your agent/advisor/company on making adjustments.
Accounts or policies without beneficiaries listed at all
- In such a situation, accounts and/or policies would probably be paid out to the estate and potentially subject to probate. Several concerns can pop up if things need to go through the probate process. By ensuring you have properly named beneficiaries you significantly increase the chance of accounts/policies going to the named parties as intended instead of potentially letting the court system get involved.
Accounts or policies with outdated information or incorrect people listed
- With outdated information it can delay the process of getting accounts and/or policy benefit payouts to the people as intended. If incorrect information is listed, it could mean assets go to the wrong people at death.
Do we have both primary and contingent beneficiaries listed? Or just primary?
- Even if you have both primary and contingent beneficiaries listed, are they up to date? If just primary, you may want to consider listing a contingent. For example, if the primary beneficiary is a deceased individual that hasn’t been updated the assets would likely pay to the owners estate and we bring in again the potential issues of having to go through probate.
Spouse listed as beneficiary? Non-spouse? Combination of the two?
- There are different rules as to how accounts and/or policy benefits would pass through to spouses and non-spouses. It’s important to understand the rules and differences of each so be sure to work with your financial professional and estate planning team as to ensure a tax-efficient distribution strategy is being implemented.
Any minors listed as beneficiary (either primary or contingent)?
- Simply put, listing a minor directly on an account and/or policy can be problematic. In some cases, it might not cause any issues while in others it could create significant ones. For example, if you have a $1,000,000 life insurance policy with a 5-year-old listed as a beneficiary and a death claim occurs, is $1,000,000 really going to be released to a 5-year-old? The answer is no. The court system and your family members are likely to get involved at this point, which could negatively impact the assets being used in the manner the owner intended for their heirs.
Is a trust listed as the beneficiary (either primary or contingent)?
- A common reason for a trust being listed as beneficiary on an account or policy is to provide control over the assets being distributed at death of the owner. While this can create more control, it could also lead to different tax treatment of the assets. Talk with your financial professional and/or attorney on the pros of cons of doing so and you can determine if this is something appropriate to consider for your situation.
Are any beneficiaries to whom you may be concerned with their financial management of the assets they’d be receiving?
- If worried about leaving accounts and/or policy benefit payouts to certain individuals, you may want to consider placing limitations on how such individuals receive any benefits/inheritances. Some companies may allow you to do this directly through restricted beneficiary payout options. For more complex strategies like creating a trust to manage and distribute estate proceeds it’ll be best to consult your estate planning attorney.
Does your estate plan line up with your beneficiary designations? Or are there inconsistencies?
- Mismatched information of what’s drafted in an estate plan vs how beneficiaries are listed could cause confusion amongst family members and the named beneficiaries. If things aren’t kept consistent, you might run into a situation where assets get passed to beneficiaries who aren’t included in your estate plan.
Okay, at this point we’re getting close to the finish line. We probably have a handful of accounts that have everything established the way we want; others may need some work. Consult with your insurance agent, financial advisor, and/or estate planner as to talk through what you want your goals to be, and all parties can work together in getting your beneficiary listings up to date.
Remember to repeat this process on a regular basis, especially when a bigger life event happens. As I stated earlier, if beneficiary designations aren’t listed properly or even the way you prefer to have them, it could make for a difficult situation your heirs then have to manage. Let’s try and avoid that as much as we can by spending a little time each year on reviewing this information as to ensure we have assets and policy benefit proceeds being passed along in the best way possible.
Investing involves the risk of loss, including total loss of principal. Past performance is no predictor of future returns. This should not be construed as individualized investing advice. Consult with your investment advisor to develop an appropriate investment strategy for your circumstances.