The Beneficiary Checklist

Do you intend to leave a legacy? Utilizing life insurance and selecting beneficiaries for your policies and/or other accounts make leaving legacy gifts simple, keeping them out of probate or the state courts. That is… unless you make a critical mistake. We wrote this beneficiary checklist to help you avoid it!

You’ve put a legacy in place that assures loved ones and/or your favorite charities will receive monetary gifts according to your wishes. There are a handful of mistakes we see people make when it comes to naming beneficiaries or keeping them up-to-date.

Table Of Contents

The Beneficiary Checklist

Follow these seven rules (plus two tips to stay updated) to avoid unintended consequences.

1. Always keep policy and beneficiaries up-to-date.

Most estate plans are updated only once a year. If there is a death, divorce, or other major change in the family, update your estate plan immediately (even if it was recently changed)! Be forewarned—a phone call to your life insurance company or bank may not be enough, so it’s important to take action quickly. Some companies still require signed paperwork, which could take some time to generate, receive, complete, and return. (We know someone who passed away while trying to remove an ex-spouse as the beneficiary of a policy.)

2. Always have secondary and tertiary beneficiaries.

Always have secondary and tertiary beneficiaries.

Let’s say your spouse is your only beneficiary. What happens if you and your spouse are in an accident and neither of you survives? You would want to make sure there are other beneficiaries!

An ideal beneficiary could be a trust that would receive and disburse the death benefit to other heirs and/or charities. And whether or not you have a trust, you’ll want to keep all beneficiaries and instructions up-to-date.

3. Never name minor children as life insurance beneficiaries. Instead, put a trust or guardian in place.

Avoid naming children as direct beneficiaries of life insurance at all costs! The insurance company would be unable to distribute the funds to a minor, and the proceeds would end up in the courts. (You can name a minor as the beneficiary to a bank account, just be cautious if the balance is high.)

Ideally, a trust will distribute monies after the child is old enough to receive the funds. Depending on the amount… you may want several disbursements over a period of years. If hiring an estate planning attorney to put a trust into place isn’t a possibility for you, an even better temporary solution is to have a guardian named as beneficiary or to put a simple trust into place yourself with Tomorrow.me (an app created by lawyers).

4. Never name your estate as your life insurance beneficiary.

This is a common mistake that should always be avoided! Naming your estate as the beneficiary subjects the life insurance probates, creditors, and potential taxes. Again, a trust can be an even better solution.

5. Always specify the details.

Always specify the details

Be clear about your intentions and specify anything that could be left to interpretation. When you name beneficiaries, include more than just “my children.” List names, Social Security numbers, and addresses/contact information to make it easily accessible for the insurance company. (This contact information should also be periodically updated, when appropriate.)

Want to distribute proceeds equally to multiple heirs? When naming multiple beneficiaries, specify whether you want the money divided per capita (per head) or “per stirpes” (by branch of the family).

Example: You have three children. Your first child has no children. Your second has two children. The third has four children. All the children are minors and cannot currently receive proceeds. Do you want your three children to receive equal amounts, or do you wish for each grandchild to also receive equal inheritances (perhaps with your adult children as trustees) to be distributed later? There’s a big difference!

6. Never name a beneficiary dependent on government assistance as a direct beneficiary.

A financial inheritance can disqualify a disabled or otherwise dependent person from receiving benefits. (This could be disability benefits, Medicaid benefits, subsidized housing or assisted living, or other benefits.) Why does this matter? It can be extremely disruptive and may subject them to a new waiting period or waiting list to re-qualify for benefits again when the inheritance is spent down. And even a small gift might force someone whose benefits are tied to their housing to move. Chances are—that’s not your intention!

Instead, you can create a “special needs trust” to support a special needs child, dependent, or another person without disqualifying them from receiving assistance. This would allow a trustee to use the monies to help them in other ways, paying for expenses that are not covered by their benefits.

7. Don’t assume your will trumps the life insurance policy.

Don’t assume your will trumps the life insurance policy

The life insurance company will pay proceeds to the beneficiaries you name on your policy. If you intend to make changes, you must make the changes with the life insurance company.

Ideally, the instructions in your will and/or a trust and paperwork you filled out with your life insurance company will all match. When there is a discrepancy, the beneficiary designation on the life insurance policy will trump the will.

Another detail to ensure you’ve covered? What happens to your online assets. Protect myPlans is a service that allows you to specify what happens with your online banking, your login codes, and other online information. Otherwise, those assets can be locked away from your beneficiaries, despite what your will says.

Two methods to keep your beneficiary designations up to date.

First, we like this suggestion from TheBalance.com that covers “How to Review Beneficiary Designations”:

Make a list of each retirement account, life insurance policy, and annuity that you have. Add two columns to your list: one for the beneficiary and one for a date. For each account or policy write the beneficiary and the date it was last updated. Besides a primary beneficiary, you should also name a contingent beneficiary. This means if the primary beneficiary predeceases you, you have already specified who the account should then go to.

Keep this list in a binder or file folder along with your other important documents. Regardless of any changes, make it a habit of pulling this binder out once a year and reviewing the information in it.

And again, if you need to update a beneficiary, contact the company. They will give you instructions for changing your beneficiary.

Another strategy we like is naming a revocable trust as the beneficiary of a life insurance policy and other assets. You can then update the trust at any time to change instructions for disbursing life insurance proceeds. This prevents having to fill out the paperwork with the life insurance company. Of course, other assets and different types of assets can also be included in the trust. However, naming a trust as the beneficiary of an IRA has pros and cons, as taxes and required minimum distributions must be considered.

Finally, it’s important to keep your life insurance itself up-to-date! Has your income increased? Is it time to insure a child or grandchild? Can you take advantage of a convertibility clause to turn all or part of a temporary term policy into permanent whole life? It might be time for a new policy, as Kim Butler explains in this episode of The Prosperity Podcast.

Let us know how we can help with your life insurance questions or needs. You can contact Partners for Prosperity at welcome@partners4prosperity.com.