You Need Beneficiaries for More Accounts Than You Think
Most people know that if you have life insurance , you need to name a beneficiary—the person or entity who receives the payout. For most of us, this is the beginning and end of our relationship with this concept, in part because we don’t have the kind of wealth we think makes us worry about where it goes (the average net worth in the US is just $192,900 after everything), and partly because people may assume that our spouse or family will automatically inherit everything.
But you should name beneficiaries for more than just life insurance. There are several real benefits to designating beneficiaries for your assets and estate, and if you haven’t updated these designations in a while, you should review and change them sooner rather than later.
Beneficiary benefits
You can assume that upon your death, your property and assets will automatically pass to your spouse, children, or an immediate family member (such as a sibling). But that doesn’t have to be the case—and even if it ultimately does, dying without a will or beneficiaries (called “intestate probate”) can trigger a lengthy and frustrating probate process governed by state laws. Sometimes this can take years, causing a lot of emotional and financial stress for your loved ones.
And even if you have a will, you should name beneficiaries for your assets because beneficiaries take precedence over your will . If your will specifies that your asset goes to your spouse, but you name your brother as a beneficiary, your brother will ultimately receive the asset. The bottom line is that naming beneficiaries gives you control over what happens to your money after you die and saves your family and other loved ones a lot of grief.
Most of your financial assets must have a current beneficiary named, including:
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Life Insurance: Probably the most obvious case for most of us. If you receive life insurance as compensation for your work, you should make sure you name a beneficiary.
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Bank accounts. Your checking and savings accounts may have beneficiaries, and naming one can make the process of accessing them much faster and easier after your death.
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Investment and retirement accounts: These include health savings accounts (HSAs) and 529 accounts .
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Annuities. Likewise, naming a beneficiary for any annuities you purchase can greatly simplify the process of transferring them to someone else.
There are two other things to consider when determining the beneficiaries of your assets:
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Keep them updated. If you haven’t checked your named beneficiaries recently, do a quick check to make sure your selection still reflects your current relationship and wishes (an obvious example here would be an ex-spouse who is still named as a beneficiary of your life insurance) .
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Contingent Beneficiaries. You should also make sure that each asset has a named contingent beneficiary – a “backup” in case your primary beneficiary predeceases you.
How to choose beneficiaries
Once you understand how important it is to name the beneficiaries of all your accounts, the challenge becomes choosing the right person. While this may seem obvious to many of us, there are a few key considerations:
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Age: Minors cannot inherit directly, so naming a child as a beneficiary complicates the situation rather than solves it. Most life insurance policies and financial accounts do not allow this, and if you manage to do this, the asset may end up in a trust administered by the state government until the beneficiary reaches adulthood.
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Possibilities. When choosing beneficiaries, think about the person’s abilities. If they are to be tasked with managing a significant financial asset, ask yourself whether they have the experience and necessary knowledge to handle it in the future.
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Circumstances. While nominating someone to receive a financial windfall may seem like an obviously good thing (after all, the beneficiaries benefit) , take a moment to think about the potential negative impact that a sudden jump in net worth could have on someone from a tax perspective obligations or eligibility criteria. for benefits. This is especially important if you are designating multiple beneficiaries to share an asset: dividing it equally is easiest, but it may not be the best solution if your designated beneficiaries have very different economic realities.
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Clarity. While most financial accounts require a specific beneficiary name, if you have the option to provide a less specific name, don’t do it. For example, naming “all my children” as beneficiaries becomes more difficult if, for example, one of your children predeceases you.
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Insurable interest. Many life insurance policies require that your beneficiary have an “insurable interest” in you—they must rely on you in some financial sense. Naming a beneficiary who does not have an insurable interest can lead to many complications, so make sure your desired beneficiary is vetted by your insurer.
Finally, keep in mind that in many cases a charity can be named as the beneficiary. Because beneficiary designation is more important than a will, it is an easy way to control who benefits from your estate after you die.