Why Do I Need to Pay Attention to Beneficiary Designations?

In 2020, about 54% of Americans held a life insurance policy. If you’re one of them, you need to know that life insurance policies, retirement accounts and annuities all pass through a beneficiary designation, not a will. Paying attention to your beneficiary designations when life circumstances change, when you start or adjust a policy or when financial needs change will provide you and your loved ones with peace of mind, especially if you work with an estate planning lawyer to optimize your beneficiary selections.

You Need to Name a Beneficiary

The most common and worst mistake to make on an annuity, life insurance policy or retirement account is to not name a beneficiary. Not naming a beneficiary means the company that administers your policy or account will have a procedure that your family must follow in order to claim the funds. In the case of life insurance, it will involve going to probate court and filing a claim, which may take a year or longer to process. If you name the beneficiary, the recipient won’t have to wait long to receive the funds.

Consider the Beneficiary’s Age

A minor under the age of 18 cannot legally claim a retirement account, annuity or life insurance policy. A conservator will have to claim it on their behalf. If you name a child as your beneficiary, the child will not directly receive or control the funds until they turn 18 years of age. Conservators can be expensive, and they must file paperwork each year with the court. Conservators must also pay an insurance bond to the court, which is protection for the assets in case the conservator misuses the funds.

Keep Special Needs in Mind

If you list a person with special healthcare needs as a beneficiary on your life insurance, annuity or retirement account, this could make them ineligible for government benefits. For example, if you have an adult child who is on Medicaid and SSDI due to one or more disabilities, they cannot have more than $1,500 in assets, excluding their primary residence and vehicle. If the person would receive more than that amount, they would lose coverage for all income-based programs. They would have to spend down their inheritance and reapply for government benefits when their funds are depleted, and the reapplication process is time-consuming and complicated.

Use the Right Name

It might sound silly, but you need to use the correct spelling and legal name of the beneficiary. For example, if your son’s name is John Doe III, but you put “Johnny Doe” on the beneficiary designation for your life insurance policy, this will cause a problem. Also consider hyphenated last names, compound last names and names that include an apostrophe. Double- and triple-check the spelling of names. If your beneficiary marries or divorces, verify that their name is correct on your beneficiary designation forms.

Update Your Beneficiaries When Circumstances Change

If your beneficiary wins the lottery or has another windfall, you might want to remove them and select someone else. When a beneficiary dies, remember to update your documents with a new selection. It’s also possible that a change in your relationship or life circumstances will necessitate a beneficiary change. A separation, divorce or falling out with your family member or partner are good reasons to update your beneficiary designations. Many people forget to do this after a divorce, and family members may experience extra stress when finding out that the funds from the life insurance policy or retirement account go to the ex-spouse.

Working with an estate planning lawyer helps ensure that you have the right beneficiary designations assigned to your assets and insurance policies. To learn more about why you need to pay attention to your beneficiary designations, reach out to the Knee Law Firm’s Hackensack office at 201-996-1200. You may also fill in our online contact form, and one of our associates will get in touch with you to schedule a consultation.