Designating a beneficiary for life insurance policies and retirement plans is important to ensure that the proceeds go to the intended recipient. Considerations include tax consequences and impact on a will. Naming an alternate beneficiary can be useful, and passing assets through a beneficiary designation can avoid probate. Careful consideration should be given to who is named as a beneficiary, as minors cannot be named and tax consequences should be considered.
Life insurance policies and most retirement plans require the plan or policy holder to decide who wants to receive the proceeds upon their death by designating a beneficiary. The purpose of designating a beneficiary is to legally indicate, in writing, who will receive the proceeds of a life insurance policy or accrued funds in a retirement account when the policy or account holder dies. There are a number of things a person should consider before making a beneficiary designation, such as the tax consequences of the designation, as well as the effect it will have on a will and testament. A person should also regularly review all financial documents that include a beneficiary designation, as major life changes may require beneficiary changes as well.
The purpose of a life insurance policy is to provide financial security to loved ones in the event of the policyholder’s death. As such, the policyholder must make a designation of beneficiary when originally taking out the policy. In most cases, a contractor has the option to designate more than one beneficiary and/or to designate alternative beneficiaries. When more than one beneficiary is named, the policy proceeds will be divided equally among the beneficiaries. The purpose of an alternate beneficiary is in case the primary beneficiary has passed away at the time of paying the proceeds. A retirement account works in much the same way in regards to naming primary or alternative beneficiaries.
One advantage of passing assets through a beneficiary designation on a life insurance policy or other financial document is that the assets, or money, usually don’t have to go through probate. Normally, when someone dies, their assets must first go through the probate legal process before they can be distributed to the beneficiaries. When a beneficiary is named on a life insurance policy or retirement plan, they generally receive the funds shortly after the creator’s death without being included in the probate estate. Also, the designation of the beneficiary will almost always take precedence over any bequests in a will.
When deciding who will be the beneficiary of a life insurance policy or retirement plan, the manufacturer should carefully consider the issues involved. In most cases, a minor cannot be a beneficiary, and if an adult becomes the beneficiary, there is no legal requirement for the adult to use the funds for the benefit of the child absent further legal maneuvering. Furthermore, the designation of the beneficiary is likely to have tax consequences for the beneficiary, which should be considered before making the designation.
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