Myth: When my employer hands me a beneficiary designation form for my employer-provided life insurance policy or gives me the link to complete the form online, it is optional and not a priority.
This is false. When you are asked to complete a beneficiary designation form, you need to fill it out as soon as possible. If you were to die without completing the beneficiary designation, the proceeds would either be distributed to your estate (requiring your loved ones to go through the costly, public, and time-consuming process known as probate) or directly to your closest living relative as determined by the terms of the life insurance policy. The specific rules of the life insurance policy determine which option would apply, but the ultimate outcome is the same: someone else would be choosing who gets the money, not you. You are given the opportunity through the use of a beneficiary designation form to determine who will receive the proceeds of your life insurance policy. Do not let someone take that choice from you.
Additionally, whoever is determined to be the rightful owner will receive a check for the full amount, unless the beneficiary is a minor, in which case the court will choose someone to hold on to the money for the minor until the minor reaches the age of majority (eighteen or twenty-one depending on your state). This leaves the money open to many vulnerabilities, like being spent on frivolous luxury items, taken in a divorce, or seized by creditors through a lawsuit or a bankruptcy.
Question 1: What are my options when asked to name a primary beneficiary for my life insurance policy?
There are several options when it comes to naming a primary beneficiary for your life insurance policy.
First, you could choose to name just one adult. At your death, after providing the insurance company with your death certificate and completing any required forms, your chosen beneficiary will receive a check for the life insurance policy's death benefit.
Second, you could choose to name multiple adults as the primary beneficiary along with the percentage or share that you want each to receive (not to exceed 100 percent or the total value of the death benefit). For example, you could designate 50 percent to Jack Jones and 50 percent to Jill Jones.
Third, you could name the trust as the primary beneficiary. At your death, the trustee of the trust will receive the check from the life insurance policy and will then manage and distribute the money according to the instructions you have left in the trust agreement.
Caution: It is not wise to name a minor child as the beneficiary of a life insurance policy. Because a minor is not a legal adult, the child is not allowed to manage the money on their own behalf. In the event a sum of money would need to be paid to a minor, the court may have to appoint someone as a guardian or conservator to manage the money on behalf of the child until the child reaches the age of majority (eighteen or twenty-one years of age depending on your state.)
Question 2: If my retirement account is meant to fund my eventual retirement, why do I need to bother naming a beneficiary? Won't everything be gone?
Retirement accounts were created to give individuals the opportunity to set aside money from their wages, income tax-deferred, to fund their retirement. While the intent is that this money will be spent down over the course of your retirement, many people still have some money left in their account at death, and ultimately, this is what you want. The hope is that you do not spend all of your money in the retirement account before you pass away or else you will end up living on far less than you had budgeted for. Therefore, it is not only favorable but likely that there will be some money left in your retirement account at your death. And because everything you own at your death has to find a new home, a beneficiary designation gives you the opportunity to determine who will receive the remaining money.
Note: Depending on the type of retirement plan you are participating in and the rules in your state, you may be required to designate your spouse as the primary beneficiary, if your spouse survives you. In the event you want to leave the account to someone else, you may be required to get your spouse's written consent.
If there is no money left in the retirement account, then the person you have named as the beneficiary will receive nothing. This is an important reason to keep an eye on your retirement account balance. If your intent is to leave a specific amount of money from your retirement account to a beneficiary, you should have a back up plan to fund this amount from another source in the event you spend through your retirement account.