Importance of Beneficiary Designations

The first item on the personal finance checklist is beneficiaries – in this post, I want to emphasize the importance of beneficiary designations. Pause for a minute and think about all the different financial accounts and insurance policies you have:

Bank Accounts

Brokerage Accounts

Retirement Accounts

Life Insurance Policies

For all of the above, you will need to name a beneficiary if you passed away. It is extremely important to have this information correct and accurate in all your accounts.

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There are two main ways things could go wrong:

#1 You have the wrong beneficiary name 

Warren Hillman had been married three times during the course of  his life. He had taken a life insurance policy when he was married to his second wife Judy Maretta. He didn’t update the beneficiary information when he divorced Judy and married his third wife Jacqueline.

Judy filed for and claimed the death benefit from the life insurance company.

Jacqueline, the wife at the time of Warren’s death sued and tried to go after Judy legally for the death benefit money. This case went all the way to the supreme court – Hillman vs. Maretta.

Long story short, the ex-wife Judy won the case and walked away with the life insurance money.

It does not matter what your Will says, your beneficiary information is what institutions go by. Sometimes, the state court may step in help you out. However, there is no guarantee.

You can see in the example above that the ex-wife Judy got to keep the life insurance death benefit.

Now let us look at the second scenario.

 

#2 What happens if there is no beneficiary information? 

I am going to use a bank account as an example.

If your spouse has an individual bank account, he / she has named you as payable-on-death beneficiary, then you can take ownership of the account by providing the death certificate to the bank.

You don’t need to go through the probate process.

If your spouse did not have anyone designated as a payable-on-death beneficiary, then you would need to go through probate proceedings before the money can be transferred to you.

In this case, you will need to go through your state’s probate process to get access to the bank account / money.

You will incur legal probate costs which could have been avoided if you had been named as the payable-on-death beneficiary.

 


What is probate?

It is a legal process that occurs when someone dies. Everything that belongs to the person becomes part of his / her estate.

The estate pays all the debts and taxes that are due.

Lawyers, court fees, and fee for all the probate proceedings are all paid for from the estate.

Whatever is left after paying off debts, taxes, and legal fees,  is distributed out per the Will. If there is no Will, then the distribution is done according to the state law.


 

As you can see, you are at the risk of total loss if the beneficiary information is incorrect or could end up paying unnecessary probate court costs / fees if there was no payable-on-death beneficiary information on the account.

It is a good practice to review the accuracy of the beneficiary information once a year or whenever there is a family status change and update it as required.

Reviewing the correctness and accuracy of the beneficiary information shouldn’t take more than an hour of your time. You only need to do it once a year or whenever there is a family status change.

Keep them up to date and save yourself a lot of trouble.

I am sure you understand the importance of beneficiary designations by now.

 

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8 thoughts on “Importance of Beneficiary Designations”

  1. I was just thinking about this on the drive into work strangely enough. If I were to pass away, I’m not even sure my wife would know all of the accounts we own. It is definitely important to get this sort of stuff in order for those unforeseen circumstances!

    1. Hi Derek,

      Welcome to Stretch A Dime! Yes, often times I used to think that if I were to die today, everything would go automatically to my wife. Unfortunately, that is not the truth. In the legal world, nothing happens automatically unless everything is properly set up.

      The easiest thing to do is update your accounts with the correct beneficiary information – it shouldn’t take more than 5 minutes per account. If you have it set up correctly, you bypass the probate process which is expensive to go through.

      You are right, spouses need to be fully aware of all the accounts, I will be covering this topic in another post. Hope to see more of you here.

      –Michael

  2. Of course another thing that can and does happen is there is so much fighting over the money that the lawyers and court expenses end up taking all of it! It is so important to get these things right.

    Enjoy the journey!

  3. Hi Michael,
    I have a question for you.
    Here is the scenario, If something happens to me and wife together, the accounts do not let you make anyone younger than 18 as beneficiary.
    What do I do in this scenario?

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