Once you’ve bought an annuity or a life insurance policy and named your beneficiaries, you may never think about those beneficiary designations again. But that could be a big mistake.
If you get divorced and remarry but fail to change your beneficiary from your ex-spouse to your current spouse, your ex will receive the proceeds. Besides divorce, other life changes, such as marriage or the death of a loved one, are occasions to review beneficiaries.
Additionally, there may be new people in your life that you want to include — such as grandchildren. Maybe there’s a charitable organization that you wish to support.
From just $107.88 $24.99 for Kiplinger Personal Finance
Be a smarter, better informed investor.
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Before making any changes, it’s important to understand how primary and contingent beneficiaries work.
If you’re married, your spouse is normally your primary beneficiary and your child or children are contingent. The contingent beneficiaries will receive the proceeds on your death if your primary beneficiary dies before you do or at the same time as you do.
While you should notify the insurer about the death of a primary beneficiary, even if you don’t, the proceeds will automatically go to your contingent beneficiaries.
Fairness across generations
If you have a number of grandchildren, the issue becomes more complex.
Suppose you’re married and have three adult children. The default is to name your spouse your primary beneficiary and name your children contingent beneficiaries who’ll all share equally in the proceeds.
Here’s where it gets complicated. Suppose child A has three children, child B has none and child C has two, for a total of five grandchildren.
What would happen if both your spouse and child C predecease you? In that case, unless you’ve set up your beneficiaries correctly, all the proceeds would go to your two surviving children. Child C’s two children would be disinherited.
That’s not what most people want.
Instead, you can specify that if one of your children is deceased that their share will go to his or her children. This is called a per stirpes distribution.
That means that each branch of the family will receive an equal share. If that’s what you want to do, you must request per stripes, because equal distribution (per capita) is the default.
Per stirpes designations are available from most but not all insurance companies.
Beneficiary designations trump your will: So get them right
Because annuities, life insurance policies and retirement plans list beneficiaries, they all bypass probate court. That means that your will won’t determine who gets the proceeds — which is why having the right beneficiaries is so crucial.
My brief video about using per stirpes is online at https://www.youtube.com/watch?v=rOBK-nVYxgA.
A free quote comparison service with interest rates from dozens of insurers is available at https://www.annuityadvantage.com or by calling (800) 239-0356.
-
I'm a Financial Pro: This Is How You Can Guide Your Heirs Through the Great Wealth TransferFocus on creating a clear estate plan, communicating your wishes early to avoid family conflict, leaving an ethical will with your values and wisdom and preparing them practically and emotionally.
-
To Reap the Full Benefits of Tax-Loss Harvesting, Consider This Investment Strategist's StepsTax-loss harvesting can offer more advantages for investors than tax relief. Over the long term, it can potentially help you maintain a robust portfolio and build wealth.
-
Social Security Wisdom From a Financial Adviser Receiving Benefits HimselfYou don't know what you don't know, and with Social Security, that can be a costly problem for retirees — one that can last a lifetime.
-
Take It From a Tax Expert: The True Measure of Your Retirement Readiness Isn't the Size of Your Nest EggA sizable nest egg is a good start, but your plan should include two to five years of basic expenses in conservative, liquid accounts as a buffer against market volatility, inflation and taxes.
-
New Opportunity Zone Rules Triple Tax Benefits for Rural Investments: Here's Your 2027 StrategyNew IRS guidance just reshaped the opportunity zone landscape for 2027. Here's what high-net-worth investors need to know about the enhanced rural benefits.
-
The OBBB Ushers in a New Era of Energy Investing: What You Need to Know About Tax Breaks and MoreThe new tax law has changed the energy investing landscape with expanded incentives and permanent tax benefits for oil and gas production.
-
Ten Ways Family Offices Can Build Resilience in a Volatile WorldFamily offices are shifting their global investment priorities and goals in the face of uncertainty, volatile markets and the influence of younger generations.
-
Should Your Brokerage Firm Be Your Bookie? A Financial Professional Weighs InSome brokerage firms are promoting 'event contracts,' which are essentially yes-or-no wagers, blurring the lines between investing and gambling.
