Beneficiaries Matter: Planning for your future

Financial planning is more than accumulating wealth and maintaining a comfortable existence. In the future, your acquired income and assets will transfer at the end of life. While not the most comfortable topic, knowing who the intended recipients are is not enough.

The question that must be answered is, “Who are your beneficiaries?”

During Life Insurance Awareness Month, it’s the perfect time for all of us to start thinking about financial protection differently. It’s not just about dollars and cents; focusing on whom and what you are protecting is equally important. Given that it is Life Insurance Awareness Month, let’s start by focusing in on that piece of the financial puzzle.

Buying life insurance

When purchasing life insurance, the driving force should be the beneficiary. If you do not have someone in mind that you want to protect, life insurance may not be in your best interest. Personally, I bought my first policy upon getting married. Buying a new home or having children are common triggers for adding life insurance due to an increased dependence on your income.

With life insurance in hand, the journey has only begun. Revisiting beneficiary designations every few years is where well-intentioned individuals can get off track.

So where to begin?

Assigning your beneficiaries

Take an inventory to identify your financial products that allow beneficiary designations. You may want to review things like:

• Individual life insurance

• Employer-sponsored life insurance

• Retirement accounts

• Pension plans

• Bank accounts

• Savings bonds

Then, think about your present circumstances compared to when you first made the beneficiary designation and be mindful of any recent life-changing events.

• Was it when you began employment at your present company years ago?

• Have you gotten married / did you get divorced?

• Do you now have children and/or stepchildren?

• Has a family member recently passed away?

• What if something happens to your primary beneficiary?

A contingent, or secondary, beneficiary is a recipient of the proceeds if the primary beneficiary predeceases you – which may be worth considering.

Who should not be named as a beneficiary? Minors or disabled people may be tricky to have as a beneficiary. Assets left to a minor often require a court-appointed custodian to manage the funds and it’s important to consider that an influx of income could disqualify a disabled person from receiving government benefits based on a change in their financial standing.

What else to consider?

Coordination of beneficiaries with your Estate Plan is often a best practice. While it will not overwrite a life insurance beneficiary designation it can help to convey instructions for how the proceeds are to be distributed.

In certain instances, it makes sense to specifically name beneficiaries vs. using more broad language like “All My Children” or “Wife/Spouse.”  Especially when adopted or stepchildren are part of the picture or an ex-spouse. To save time, a designation such as all my surviving children/stepchildren will help keep things clear.

A “per stirpes” option – one in which your estate is divided equally among the beneficiary’s descendants if they pass before you – can be attractive when the desired outcome is for assets to pass equally among the branches of a family. This happened to me, personally, when my mom and uncle predeceased my grandmother. Rather than my mother’s portion of the inheritance being distributed equally between her surviving brother and sister, her share was passed down equally to her children.

So why is this all so important?

Depending on the size of the policy, or the amount of the proceeds, incomplete or inaccurate beneficiary designations could cause delays in the receipt of funds or unintended tax consequences for recipients. While a surviving spouse may receive the proceeds tax-free, should he or she also be deceased the resulting inheritance left to an estate may result in a taxable event.

Millions of life insurance proceeds are unclaimed due to beneficiaries not even knowing about the policy naming them. Many beneficiaries don’t know the insurer's information or the location of the policy. It is important to communicate with your beneficiaries and make them aware.

You have worked hard to provide for a bright future, so don’t let something as important as a beneficiary go unattended.

_{Disclosure: The information provided in this blog does not, and is not intended to, constitute financial planning, tax, or legal advice; instead, all information, content, and opinions discussed in this blog are for general informational purposes only. You are encouraged to seek financial, tax, and legal advice from your professional advisors.}