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 that receives the payout. For most of us, that’s the beginning and end of our relationship with the concept, in part because we don’t have the sort of wealth we imagine necessitates worrying about where it goes (the median net worth in the U.S. is just $192,900, after all), and in part because people might assume that our spouse or family will just automatically inherit everything.
But you should name beneficiaries for more than just life insurance. Designating beneficiaries for your assets and estate offers several real benefits, and if you haven’t updated those designations in a while you should review and change them sooner rather than later.
Advantages of beneficiaries
You might assume that if you die your property and assets will pass automatically to your spouse, children, or closest relative (like a sibling). But that’s not necessarily the case—and even if it eventually turns out that way, dying without a will or beneficiaries (called “intestate succession”) can trigger a lengthy and frustrating probate process controlled by state laws. This can sometimes take years to complete, causing a lot of emotional and financial stress for your loved ones.
And even if you have a last will and testament, you should designate beneficiaries for your assets, because beneficiaries supersede your will. If your will states that your asset goes to your spouse, but you listed your brother as the beneficiary, your brother will wind up receiving that asset. The bottom line is that designating beneficiaries gives you control over what happens to your money after you pass, and spares your family and other loved ones a lot of grief.
Most of your financial assets should have an up-to-date beneficiary named, including:
Life insurance: Probably the most obvious case for most of us. If you receive life insurance as a benefit from your job, you should make sure you’ve designated a beneficiary.
Bank accounts: Your checking and savings accounts can have beneficiaries, and naming one can make the process of accessing them after your death much faster and much easier.
Investment & retirement accounts: This includes health savings accounts (HSAs) and 529 accounts.
Annuities: Similarly, naming a beneficiary for any annuities you’ve bought can make the process of transferring it to someone else much easier.
When figuring out beneficiaries for your assets, there are two more things to consider:
Keep them updated. If you haven’t reviewed your named beneficiaries recently, conduct a quick audit to make sure your choices still reflect your current relationships and desires (the obvious example here would be an ex-spouse who’s still listed as your life insurance beneficiary).
Contingent beneficiaries. You should also make sure that every asset has a contingent beneficiary named—a “backup” in case your primary beneficiary has predeceased you.
How to select your beneficiaries
Once you realize how important it is to name beneficiaries for all your accounts, the challenge becomes choosing the right person. While this might seem obvious to many of us, there are a few key considerations:
Age: Minors can’t inherit directly, so naming a child as a beneficiary adds complication instead of removing it. Most life insurance policies and financial accounts won’t allow it, and if you manage to do it the asset might wind up in a trust administered by state government until the beneficiary is an adult.
Capability. When choosing beneficiaries, think about the person’s capability. If they’re going to be placed in charge of a significant financial asset, ask yourself if they have the experience and necessary knowledge to handle it going forward.
Circumstances. While naming someone to receive a financial windfall might seem like an obviously good thing—beneficiaries benefit, after all—take a moment to think about the potential negative impact that a sudden jump in net worth might have on someone in terms of tax liability or qualifying for benefits. This is especially important if you’re designating several beneficiaries to share an asset—dividing it up equally is the easiest thing to do, but might not be the best thing to do if your designated beneficiaries have very different economic realities.
Clarity. While most financial accounts require a specific name for beneficiaries, if you have the option of being less specific—don’t. Naming “all my children” as beneficiaries, for example, gets complicated if one of your children predeceases you, for example.
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 that lacks an insurable interest can lead to a host of complications, so make sure your desired beneficiary will pass muster with your insurer.
Finally, keep in mind that in many cases you can name a charitable organization as a beneficiary. Since beneficiary designations trump wills, this is an easy way to control who benefits from your estate after you pass.