It’s smart to review your beneficiaries on an annual basis. Life can bring many changes and some of these changes make it necessary to update your beneficiaries.
Have any of the following occurred in your life since your last beneficiary review?
- You became engaged.
- You were married.
- You were divorced.
- Your child is no longer of minor age.
- A new grandchild was born.
- You created a will.
- You created a trust.
- You moved to a new state.
- You took out a loan.
- You lost your spouse.
- You became involved with a charity.
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You buy life insurance to financially protect people you leave behind when you die. These individuals are your policy’s beneficiaries. However, life brings change. It’s important to review your policy’s beneficiaries to make sure it’s still aligned with your wishes. An annual review of your policy is a good idea and there are certain life events when it’s imperative.
If you became engaged…
If you want your future spouse to be a beneficiary of your life insurance policy, be sure to update the policy to designate your fiancé. You are not required to be legally married in order to name him or her your policy’s beneficiary.
If you were married…
If you were not yet in a serious relationship with your spouse when you first bought life insurance, you may have named a parent or sibling as your policy’s primary beneficiary. Be sure to update the designated beneficiaries if you wish your spouse receive any benefits.
If you were divorced…
Dying and leaving life insurance benefits to an ex-spouse happens more often than you may think. If you get divorced, forget to remove your ex-spouse as the policy beneficiary and die, the death benefit goes to your ex-spouse. Even if you remarry, your surviving spouse would have no legal rights to that death benefit.
» Learn more: Life Insurance After a Divorce
If your child is no longer of minor age…
People often buy life insurance to protect the financial wellbeing of their children, but it’s not advisable to name minors as beneficiaries. Instead, you typically name spouses, trusted relatives, or trustees who will manage the death benefit on behalf of your minor children.
However, once your child has become age of majority (between 18 and 21 years old depending on the state you live in) you can designate them as a beneficiary if you wish, though some policyowners do choose to wait to update the policy’s beneficiary until the child is financially mature as well.
If a new grandchild was born…
If you purchased life insurance to leave an inheritance behind for your grandchildren, don’t forget to update the beneficiaries through the years. For example, if you purchased a policy when your eldest daughter gave birth to the family’s first grandchild, you may have named your daughter the beneficiary of your policy. Years later if your youngest daughter has a baby, don’t forget to update your policy.
You can name more than one primary beneficiary. You also have the option to split the death benefit equally or in specified percentages.
If you created a will…
If you own anything, drawing up a will is a great idea. Without a will in place, the state decides how your property is distributed and, in some cases, even decides who raises your minor children.
Your life insurance designations trump whatever is designated in a will. For example, if you state in your will that you wish for 50% of your life insurance death benefit to go to your mother, but your life insurance policy states that 100% of the death benefit is going to your spouse, your wishes in the will are going to be denied. So, if you created a will recently be sure your life insurance beneficiary designations match what your will states if that is your wish.
» Learn more: The Importance of Writing a Will
If you created a trust…
There are many times in which it makes sense to name a trust the beneficiary of a life insurance policy.
For example, if your desired beneficiaries:
- Are minors (under age 18)
- Have special needs
- Have creditor issues
- Have alcohol/drug issues
- Cannot be trusted with large sums of money
Then naming the trust instead of the individual as beneficiary is best because you can specify exactly when and how much they can receive, and the trustee can manage it for you on your behalf.
If you moved to a new state…
While naming your spouse as your life insurance policy beneficiary is quite common, not everyone chooses to do so. However, if you live in a community-property state, you need your spouse’s consent in writing before designating someone else.
In most cases, if you were living in a non-community property state and then moved into one, separate assets you owned prior to moving do not automatically become joined; however, it’s not a bad idea to review the property law of your new state to ensure your life insurance isn’t affected.
If you took out a loan…
Co-signed loans are not uncommon. If you asked a friend or loved one to help by co-signing a loan for you, consider updating your life insurance policy beneficiaries so your cosigner isn’t left with your debt should you die prematurely.
Don’t forget that you can designate specified percentages of the death benefit to different beneficiaries. For example, if you own a $500,000 life insurance policy and your parents co-signed on a mortgage loan worth $250,000, you can designate 50% of the death benefit to your parents until the loan is paid off. If you prefer, you can opt instead to purchase a separate additional $250,000 term policy specifically for your parents with a term length lasts until the loan is paid off.
» Learn more: Life Insurance for Cosigners
If you lost your spouse…
If you name your spouse your primary beneficiary, and he or she predeceases you, you should update your policy. This scenario is also a good reminder as to why naming contingent beneficiaries is important.
For example, if you and your spouse were to die at the same time, a car accident for example, and you named no contingent beneficiary, i.e. back-up beneficiary, then your policy’s death benefit would go to your estate. This death benefit amount would then be added to the value of your estate. This can cause tax issues if the total value is a substantial amount, not to mention the discussion of who is to receive this money can get a little messy.
If you became involved with a charity…
Did you know you can name a charitable organization as a life insurance beneficiary? Like any beneficiary, the charity will receive the proceeds of your policy upon your death.
» Learn more: Using Life Insurance to Help Your Favorite Charity
Life can bring many changes and some of these changes make it necessary to update your beneficiaries.
While life insurance is one financial product that needs a beneficiary review, don’t forget to also review the beneficiary designations if you own any of the following financial products:
- Individual retirement accounts (IRAs)—traditional and Roth
- 401(k) retirement plans
- Defined contribution and defined benefit plans
- Certificates of Deposit (CDs) and bank accounts
- Stock brokerage accounts
- Bonds—commercial and government
- Mutual funds—all types
- Money market funds
- Medical insurance benefits
- Disability and long-term care insurance benefits
- Some accident and health insurance plans such as critical illness and hospital indemnity plans benefits
- Deferred contribution and salary contribution plans
Here are some last minute important facts to remember about beneficiary designations:
- Beneficiary designations generally can’t be made in a will; they must be made in writing on a form acceptable to the financial company.
- Beneficiary designations can’t be changed orally; they can only be changed in writing on an acceptable form.
- It isn’t possible to make one “blanket” beneficiary designation that will apply to all your financial products; they must be made asset by asset.
- In many cases it may be possible to name two types of beneficiaries: (1) primary beneficiaries—your first choice—and (2) contingent beneficiaries—backup or substitute beneficiaries who will receive the benefit (or a share of it) if a primary beneficiary is unable or unwilling to receive it.
- Beneficiaries can’t name their own replacements.
If you have multiple financial products that name beneficiaries, it may seem impossible to keep track and review them accordingly. A good way to solve this problem is to have a beneficiary folder.
Here’s how to make one:
- Create a list of beneficiary assets.
- Locate the beneficiary designation paperwork for each asset on your list.
- Organize that information and put it in a beneficiary folder; make sure to include a hard copy of each beneficiary designation.
- Review each of your primary and contingent beneficiary designations to determine if they still represent your desires today.
- Change/update your primary and contingent beneficiary designations as your family and financial situation changes. Changing a beneficiary usually requires filling out and filing a new beneficiary form.
- Coordinate your beneficiary designations with your wills, trusts, and other wealth transfer documents.
- Review all beneficiary designations at least every two years to make sure they are up-to-date; when you file a new form, include a copy in your beneficiary folder.
- Tell people you trust where your beneficiary folder is so it can be located when it is needed.
Your folder can also include copies of your wills, trusts, powers of appointment, living wills, and health care proxy statement.
» Learn more: The Importance of Having a Health Care Power of Attorney
No matter what assets you have, you can’t take any of it with you; what’s leftover will be the financial legacy you leave behind. Be sure it’s left to the right people.
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