You Probably Need to Update Your Beneficiaries. Here’s Why

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You’re asked to name a beneficiary many times over throughout your lifetime—each time you start a new job that offers a 401K or life insurance policy, or when opening retirement accounts or annuities. You’ve done it so many times you likely don’t recall whose name you mindlessly jotted down most of the time. No matter, you think. You’ve written a will. You’re all set, right? Wrong. Here’s why it’s so important to keep your beneficiaries up to date.

What is a beneficiary?

When you open a retirement plan, annuity, or life insurance policy, you’re generally required to select a beneficiary who will inherit the account (or receive the life insurance benefit) when you die. Typically, you’ll be asked to name at least two people, a primary and a secondary or contingent beneficiary, in the event that your first choice pre-deceases you. But you can designate additional beneficiaries if you choose, and note what percentage of your assets should go to each of them.

A beneficiary doesn’t have to be your spouse or even a family member. You can instead designate a friend, charity, or another organization to inherit your assets. (One word of caution: Minors can’t inherit financial assets directly, and listing a minor as the beneficiary of your policy or account could cause the funds to be tangled in legal and financial oversight. Setting up a trust—and naming the trust as the beneficiary of the account—is typically the better option.)

Why beneficiaries are important

Beneficiary designations override any instructions you leave behind in your will, so it’s critical to get and keep your beneficiaries in order as your life situation and relationships change.

Perhaps you designated your then-spouse as the beneficiary of your life insurance a decade ago, but your niece has been looking like a better option ever since the divorce. Or maybe you jotted down your (now deceased) mom’s name on that 401(k) at your first job, and never circled back to update the paperwork. If you think updating your will should suffice or simply have a set-it-and-forget-it mentality, you could wind up costing your loved ones dearly.

What happens without a named beneficiary

If you’re married, federal law says that your spouse is automatically the beneficiary of your 401(k) or other pension plan. (If you want to pick a different beneficiary, your spouse will have to sign a waiver before you can do so.) But with an IRA or any other type of account with a possible beneficiary, or if you aren’t married, not signing the proper forms can mean a labyrinthine process for your heirs.

In those cases, if you die without a named beneficiary, the money follows the plan’s payment policy, which varies from plan to plan. One option is that the money passes into your estate, which means it’s subject to probate and the funds could be used to pay any creditors, final bills, and taxes. Only after all of those debts are satisfied would the money be distributed according to your will. (If you also lack a will, your assets will eventually be distributed according to state intestacy laws.)

Another possibility is that the payment policy passes the funds directly to the decedent’s heirs-at-law. If that happens, the money isn’t part of your estate and won’t be used to satisfy any outstanding financial obligations. But that also means the money doesn’t come under the guidance of your will: If you stated that you wanted to leave all of your assets to charity, for instance, but your sister is your closest heir according to intestacy laws, your sister would receive your death benefit directly. (And whether or not she uses the funds to follow your charitable wishes is out of your control.)

Reviewing and changing beneficiaries

As a rule, it’s a good idea to review your beneficiary designations each time you experience what the financial world calls a “life event.” This includes:

  • marriage
  • divorce
  • birth of a child
  • job change
  • retirement
  • death of a spouse or close family member

When one of those life events hits—or if you simply haven’t looked at your beneficiaries in a while—start by making an full list of your accounts, including retirement, life insurance, and annuities. You can typically review your beneficiaries online, though making changes to those forms will usually require physically signing and returning them. (There should not be a cost to update beneficiaries.) Then keep that updated list of accounts and beneficiaries wherever you store important documents.

If you’ve removed a beneficiary from any of your accounts, there’s no need to update the person. But if you list someone as the new beneficiary on an account, it’s worth informing them so they can be proactive about notifying the company if you die. That’s especially important if you don’t (yet) have a named executor, who can oversee the distribution of your assets upon your death.

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