Life insurance policies have a way of drifting into the back of one’s mind. You pay the premiums and never think about it until the next one is due. Perhaps you opened your retirement account years ago when you started a new job. It is possible that the only consideration you give to your investments is the bottom line.
Unfortunately, ignoring these and other important accounts can lead to serious complications for your loved ones. You may think you have protected them with a comprehensive estate plan, but if your beneficiary designations on life insurance and other accounts do not match, your plans may not go as you expect.
A cautionary tale
What many do not understand is that a will cannot override the beneficiary designations on insurance policies, annuities, 401(k) plans, IRAs and other investments. Your life insurance policy and other similar assets legally bind the insurer to pay the benefits to the beneficiary you have named, even if your will says otherwise. If you do not name a beneficiary, the assets go to whomever you name in your will or to the heirs designated by state law.
On the other hand, neglecting to update your beneficiaries may result in your assets going to someone other than you intend. For example, if your original life insurance beneficiary designation was your spouse but you have since divorced and remarried, failing to change the beneficiary designation on your account means your ex could inherit funds you meant for your new spouse. These oversights can be especially tragic when children are involved.
One suggestion for keeping your designations current is to create a master list of all your accounts and policies, the beneficiaries listed for each and the date of the last time you updated the accounts. If you need to change your designation, you can request the appropriate forms from the company. Additionally, it is wise to name a contingent beneficiary for your accounts. This way, if your beneficiary should pass away before you, the contingent you choose will receive the assets.
At the very least, failing to update and keep current the beneficiaries of your insurance policies and investments could leave your loved ones with years of costly administrative confusion as they try to disperse the assets and avoid the tax ramifications. At the worst, your loved ones may face confusion and financial struggle when they do not receive the inheritance they were counting on. The lesson is to set aside regular time to review your estate plan and all your accounts to ensure they are up to date.