Protecting your loved ones

November 6, 2016

You want to protect your loved ones and your loved ones want to protect you. One of the ways we protect one another is through beneficiary designations. We can designate beneficiaries in life insurance policies, annuities, IRAs and company retirement plans, to name a few.

Beneficiary designations require correctness when they are set up and, like many other elements of a financial plan, they require periodic reviews. This column will give you some ideas on how to establish beneficiary designations for you and yours.

Let’s start with life insurance policies, as they are pretty straightforward, or so it would seem. The proceeds of a life insurance policy are distributed upon your death to your chosen beneficiary(s). A life insurance beneficiary can be an individual(s), your estate or an organization. The wording of beneficiary designations is critical. An improperly named beneficiary can have drastic effects on how the insurance proceeds will be distributed.

Multiple life insurance beneficiaries, like a single beneficiary, should be identified in the policy by name. There are no limits to the number of beneficiaries you can name.

Do not designate a spouse using the words “husband” or “wife.” This could result in an ex-spouse receiving proceeds intended for the current spouse. Obviously, it is important to reexamine insurance beneficiary designations during a divorce.

If you do decide to allocate your death benefit to several individuals, it is a good idea that you designate a percentage of the life insurance proceeds to each individual rather than a specific amount. This is because, often, a policy grows in value throughout its life, so specifying a percentage each beneficiary receives instead of a precise amount eliminates the need to correct the policy each time the policy’s value is adjusted.

Naming specific children may mean that later-born children will be left out unless the beneficiary designation is changed. Naming “Children of the insured, Harry Holiday” could mean that your wife’s child from a previous marriage, whom you meant to include, is excluded. Naming “Children born of the marriage of Nancy and Harry Holiday” could mean adopted children are excluded.

In most situations it is not advisable to name minor children as beneficiaries, but rather to name a guardian for minor children and a trustee for insurance proceeds and other assets to be managed until the child reaches the age of majority (which is 18 in New Jersey).

Likewise, if a child named as beneficiary under your policy predeceases you and you would want the proceeds to go to their child(ren), you must specifically state that. You must also decide how such grandchildren will share in the proceeds with your other children, whether everything will be divided equally, or whether the grandchildren will split what would have been their parent’s share.

Contingent beneficiaries can (and should) be named on your life insurance policy (s). A contingent beneficiary only becomes a beneficiary if your primary beneficiary dies. This is especially important in cases where you and your primary beneficiary die near the same time.

Lastly, let’s talk about the last place that you want your insurance proceeds to wind up – in your estate. If you have not named a contingent beneficiary and your primary beneficiary is deceased, the proceeds of an insurance policy(s) pass to your estate where they can be subject to unnecessary taxes and fees. To avoid this, take a few minutes to add a contingent beneficiary to your life insurance policy(s).

It is good planning to anticipate as many situations as possible. It is also vitally important to review your beneficiary designations on a regular basis. Changing beneficiary designations is easy, but you have to remember to do it.

Unless you make an irrevocable designation (one that cannot be changed), as might be the case in a divorce settlement, you can change beneficiary designations as often as you like. You do not want to change beneficiaries frivolously, but you should change them when it is appropriate to do so.

Wow! There’s no space left to talk about beneficiaries for annuities, IRAs and company retirement plans. I’ll get to them later.

The opinions voiced in this material are for general information only and are not intended to provide specific tax or legal advice for the individual. Specific situations should be discussed with a qualified tax or legal advisor. Randy Neumann, CFP® is a registered representative with and securities offered through LPL Financial. Member FINRA/SIPC. Financial planning offered through Randy Neumann & Associates, a Registered Investment Advisor, and separate entity from LPL Financial. He can be reached at 600 East Crescent Avenue, Suite 104, Upper Saddle River, NJ 07458, 201-291-9000.