Reminder: Review and Update Your Named Beneficiaries

Life insurance policies and retirement accounts can last for a long time – typically decades. A lot may have changed since you bought that life insurance policy, or set up that IRA or old 401(k) account. Job changes, marriages, divorces, births, deaths, adoptions, and all manner of other life passages can combine to make it desirable to change the named beneficiaries on all these accounts.

Simply updating your will from time to time isn’t enough to protect your family and loved ones in most cases. You need to look at the specific individuals named as beneficiaries on your life insurance and retirement accounts, as a minimum, in order to protect their interests and avert financial disasters such as accidentally disinheriting a cherished stepchild or long-time life partner. A regular review of your financial accounts should be part of your financial planning routine.

The importance of named beneficiaries
Normally, when a person dies, his or her assets go to a surviving spouse. If there is no surviving spouse, the assets generally go through probate. In probate, court officials will go through the assets and distribute them to known creditors. Tax collectors and creditors get to collect on the deceased assets before the remainder is distributed to heirs. This process can be long and expensive, and take months and sometimes years to complete – which can present hardships to surviving loved ones, who may be incurring expenses themselves.

When you specify a beneficiary, by name, on a life insurance or annuity, the assets bypass probate. They are handled under contract law, rather than probate law, and your loved ones can receive the assets in a matter of days, not months, and probate attorneys don’t generally subtract money owed to creditors or the IRS from these assets.

Life insurance beneficiaries
Generally, life insurance beneficiaries should be those most harmed by your death. But you can select and change the beneficiaries on a policy you own as you see fit. Reviewing your life insurance beneficiaries regularly, including contingent beneficiaries.

Here are some common circumstances that may result in the need to change beneficiaries:

  • A beneficiary may die.
  • You may divorce or marry.
  • You may have another child or grandchild you wish to include.
  • A child grows up and no longer needs a trust or trustee to receive the money on his or her behalf.
  • You may clear a debt secured by the life insurance policy.
  • You have a change in business partners.
  • A beneficiary may prove to be a spendthrift and not capable of handling large sums of money.
  • A beneficiary is disabled and inheriting money could result in making him or her ineligible for need-based benefits such as Medicaid or food stamps. In this case, you may want to set up a special needs trust to receive the money on his or her behalf.
  • You want to compensate a beloved family member or caretaker for time spent caring for you later in life.
  • Creditors may seize any money that goes to a given beneficiary, such that the money is better left to a trust or another family member.
  • You may want to name a charity as a beneficiary, or change that charity.
  • There is someone new who would be greatly harmed by your death.

Don’t Forget Retirement Accounts
In some cases, naming beneficiaries on retirement accounts entitles heirs to tax advantages they would not get if they were not named designated beneficiaries. So it’s important to include your retirement accounts, including 401(k)s, 403(b)s, IRAs, SEPs and SIMPLE IRAs when you are doing a routine beneficiary review.

For more information, or to schedule an annual beneficiary review and insurance checkup, call us today.