Pop quiz: When is the last time you updated your life insurance beneficiaries and beneficiaries on other important financial documents?
If you are like most people, you probably don’t think about your beneficiaries very often, but you should. Financial advisers say that failing to keep your beneficiaries up-to-date is a common and costly mistake. Failure to periodically update your beneficiaries could have unintended consequences. You’d probably prefer that your current spouse rather than a former spouse would be the beneficiary of your assets – but if you haven’t updated your paperwork, your ex could see a big payday on your passing!
As you prep for tax filing and gather your financial documents, it’s a good time to add beneficiary updates to your checklist to be sure that your designated beneficiaries are up to date. Life and circumstances change. Parents die, marriages dissolve, children are born, and any of these events may warrant a change in beneficiaries.
What documents should you check? In the linked article above, financial advisers say:
In addition to IRAs of the traditional, Roth, SIMPLE and SEP varieties, beneficiaries should be checked on 401(k) plans, 403(b) and deferred-compensation employer plans, life insurance policies, 529 education accounts and any bank or other account designated as “Transfer on Death.”
Here are some best practices to consider when naming beneficiaries:
Always name a beneficiary. People who have wills often think they have their beneficiaries covered, but this assumption can be wrong. Generally, beneficiaries named in insurance policies and retirement plans will take precedence over any instructions you leave in your will. Make sure you have specified individuals as beneficiaries in your policies and plans. People often name their “estate” as the beneficiary but this can lead to benefits being tied up in probate court. Failure to name a beneficiary may also mean that you miss out on certain plan or policy advantages. For example, if you name an estate as beneficiary, an IRA will be liquidated on your death and taxes will be due. If your spouse is named as beneficiary, he or she could potentially continue to enjoy tax-free growth.
Be specific. Avoid ambiguous language. Simply stating “my husband” or “my niece” may not be sufficient, particularly in instances of multiple marriages. It’s a good idea to use full names of intended beneficiaries to avoid potential confusion or disputes.
Name a secondary beneficiary. Make sure that it will be you and not your state law that determines who will be the recipient of your policy benefits. If your primary beneficiary should pass away and you have not named a secondary or contingent beneficiary, your insurance policy or retirement plan will be distributed according to your will. If you have no will, the decision will default to state law.
Keep important records in a secure place and tell a trusted family member what and where they are. Many people die suddenly without leaving instructions as to where a will, insurance papers and other important records are kept. All too often, benefits go unclaimed because family members don’t know about potential benefits or can’t find important account information. Bank accounts and insurance policies are overlooked. Make sure someone in your family is familiar with your most important records and where they are kept.
- National Association of Insurance Commissioners: Life Insurance: Reviewing Your Policy Important to Securing Your Family’s Future
- Trusted Choice: Best Way To Choose a Life Insurance Beneficiary
- Insurance Information Institute: What is a beneficiary
You can also talk to your independent insurance agent about updating your life insurance. Don’t have life insurance or don’t have an independent insurance agent? If you live in New England, find a Renaissance Alliance insurance agent near you to help you with life, auto, homeowners, and many other types of insurance.