Why a regular beneficiary review should be part of your financial planning routine.
A lot of financial planning focuses on the questions we think about regularly: Are we saving enough? How are our investments doing? When should we retire? How much income will we need? Beneficiary designations usually don’t get nearly as much attention.
Often, you name a beneficiary when you open an IRA, enroll in a 401(k), or purchase a life insurance policy and then don’t look at the designation again for years. That’s why I believe a regular beneficiary review is one of the simpler financial-planning habits worth adopting.
What is a beneficiary?
A beneficiary is the person or entity you designate to receive the assets in an account after your death. Depending on the account, you may be able to name both a primary beneficiary, the first person or people in line to receive the assets, and a contingent beneficiary, who would receive them if the primary beneficiary cannot.
Why review your beneficiaries?
Quite simply, life changes.
Someone you named 10 years ago may no longer reflect what you would choose today.
Consider reviewing your beneficiaries following events such as:
- Marriage
- Divorce
- The birth or adoption of a child
- The death of a family member or beneficiary
- A change in employment
- An inheritance
- Other significant changes within your family
Your 401(k) is only the beginning
One of the bigger mistakes I see people make in financial planning is looking at accounts in isolation. If you’re reviewing beneficiaries, use the opportunity to look across your financial life.
Depending on what you own, that could include:
- 401(k), 403(b), or other workplace retirement plans
- Traditional IRAs
- Roth IRAs
- Life insurance
- Annuities
- Bank accounts with beneficiary designations (sometimes called payable on death)
- Investment accounts with transfer-on-death designations
- Trust-related accounts
- Other accounts on which you’ve named a beneficiary
Don’t forget your contingent beneficiaries
People often focus on the primary beneficiary, but the contingent beneficiary deserves attention too.
As part of your review, ask:
- Do I still want the people currently listed?
- Are my primary beneficiaries correct?
- Are my contingent beneficiaries correct?
- If I’ve named multiple beneficiaries, are the percentages what I intend?
- Have there been any family changes since I last completed these forms?
- Have I opened or rolled over an account that needs its own beneficiary designation?
The goal isn’t simply to have a beneficiary listed. It’s to make sure the designation continues to reflect your intentions.
Beneficiaries can also affect what happens after death
Beneficiary planning isn’t only about who receives an account. With retirement accounts, the beneficiary’s relationship to the original owner and other circumstances can affect the distribution rules that apply after death.
Distribution requirements depend on factors including whether the beneficiary is a spouse, minor child, disabled or chronically ill person, or another type of beneficiary, as well as other circumstances surrounding the original account owner.
You don’t need to memorize those rules to perform an annual beneficiary review. But they are a good reminder that who you name can have financial and tax implications, and more complicated situations may warrant professional tax or estate-planning advice.
Make it an annual habit
Beneficiary planning doesn’t need to be complicated.
I like the idea of treating it like an annual financial checkup:
Review the account. Review the primary beneficiary. Review the contingent beneficiary. Ask yourself whether the designation still reflects what you want today.
And don’t wait for your annual review if life changes. A marriage, divorce, birth, death or other significant event is a good reason to take another look. A few minutes spent reviewing beneficiary designations today can help make sure your financial accounts better reflect the plans you’ve put in place for the people and organizations that matter to you.