What to consider when choosing a beneficiary for life insurance or other financial accounts

What is a beneficiary?

A beneficiary is an individual, entity or a trust nominated by an account holder or insurance policyholder to receive the benefits or proceeds from a life insurance policy or financial accounts (such as pension or retirement accounts) when the account holder or policyholder passes away. The recipient is legally entitled to receive the funds. Depending on the account, the distribution may be tax-free.

• Beneficiaries for a life insurance policy. The owner of the life insurance policy will designate beneficiaries or entities that the person wants to financially protect after the policyholder passes away. These beneficiaries receive the death benefit which can be used for various purposes, such as paying off debts, covering funeral expenses or simply as financial support.
• Beneficiaries of financial accounts. Generally, the beneficiary for a retirement account or pension is the surviving spouse, unless the spouse waives that right. Some retirement accounts or plans may have different rules for designating beneficiaries. Check with your employer or financial institution about the rules pertaining to your plan. For these account types, a beneficiary also decides how to make use of the funds. With other financial accounts, such as investments or CDs, the rules are less restrictive.

Why is choosing a beneficiary important?

When you have accounts like life insurance policies, investments, pension plans and retirement accounts, it is important to designate a beneficiary. Upon your death, proceeds from these accounts will typically go directly to the beneficiaries and bypass probate, which can be a slow and expensive legal process of distributing your assets after you pass. Assigning beneficiaries allows you to fulfill your intentions and possibly avoid some conflict among family members at the time of your passing. In addition, there is usually flexibility for beneficiary designation. You can review the beneficiaries list at any time and adjust it as your priorities in life change.

Tips to consider when selecting a beneficiary

Choosing a beneficiary is a very personal decision, and different for everyone. In some cases, people want to use a death benefit to help protect their loved ones, and others might see it more as a financial transaction. Here are some tips to keep in mind when you are selecting your beneficiary.

• Insurable interest – The person or entity named as a beneficiary must have an insurable interest in the insured person. While the insured generally has the right to name any beneficiary, there must still be a legitimate financial interest between the parties. In many cases, beneficiaries rely on the insured for financial support, such as the spouse or dependent children, so there is an apparent financial interest and purpose of insurance between the parties.
  
• Age – Many insurance companies, pension plans, and retirement accounts will not pay benefits to someone under age 18. A better option may be to create a trust for the minor and name a trustee to manage the account until the child reaches the age you specify in the trust.
  
• Ability to manage money – If your beneficiary is not able to manage money, consider establishing a trust and name a trustee to invest and disburse funds on their behalf.
  
• Contingency – Name a secondary beneficiary so that if your first beneficiary dies before you, the account proceeds pass directly to the secondary beneficiary without probate.
  
• Options – Your beneficiary can be a spouse, child, or other individual(s); a trust; a charity or organization. If you don't specify a beneficiary, your assets will go into your estate and be distributed according to your will.
• State or policy life insurance beneficiary rules – Some states or insurance companies might restrict who you can name as your beneficiary. Consult an attorney to provide legal guidance for these state specific issues.
• Estate as a beneficiary – It's usually not recommended to name your estate as a beneficiary, since doing so means those assets may be subject to probate.

Don't "set it and forget it"

Because so many things can change throughout life, consider reviewing your beneficiary designations every few years — and after a life event such as a marriage, the birth of a child, adoption, divorce, remarriage or death — to confirm they're current. Otherwise, you may risk leaving the proceeds to an ex-spouse or someone who has died before you.

Get specific information about beneficiaries from a legal or tax adviser. Contact your agent or insurance company to make any beneficiary designation changes.

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