Update Beneficiaries: Avoid Costly Financial Planning Errors
By Paul K. Doak, CFP
Financial planning. Just the words alone can be intimidating. But don’t worry—we’ve got your back!
Instead of a confusing, dreaded chore, think of financial planning as having enough money for your journey through life. And then some!
But make no mistake, the financial planning journey isn’t without potholes. One of the biggest obstacles? Failing to update your beneficiaries. It’s a simple step, but when overlooked, it can have disastrous consequences.
Let’s confirm that your legacy goes where you intend.
In addition to reviewing the real-life consequences of ignoring this critical part of financial planning, this article takes a deep dive into the value of routinely checking and updating your beneficiaries across all of your financial accounts.
Real-Life Horror Stories: When Outdated Beneficiaries Cause Chaos
Let’s start by taking a look at some real-life consequences of outdated beneficiaries.
Imagine a situation where a man remarries but neglects to change his life insurance policy’s beneficiary. When he passes away, his current spouse and kids receive nothing from the settlement because the entire payout goes to his ex-wife. Think about it—would you want your ex-partner to get all your money when you die?
Or consider a woman who names her parents as beneficiaries on her 401(k). Years later, she has children of her own and her parents have died. Unfortunately, if she passes away without updating the beneficiary, rather than going immediately to her children, her 401(k) can wind up in probate, potentially leading to delays and legal issues.
These are real-life accounts of families dealing with emotional and financial distress as a result of out-of-date beneficiary designations. The importance of proactive beneficiary management cannot be emphasized enough!
How to Review and Update Your Life Insurance Beneficiaries
Offering loved ones a safety net in the event of your death, life insurance often plays a pivotal role in financial planning. Although it’s a simple process, reviewing and changing your life insurance beneficiaries requires proactive effort.
First, find your insurance policy documents, usually available online via the website of your insurance company or in hard-copy format. Carefully examine the current beneficiary designations.
Then consider your current financial goals and personal relationships. It’s important to update your beneficiaries in light of any major life events, such as marriage, divorce, birth, or death.
Lastly, to obtain the required forms, contact your insurance provider directly or initiate the updating procedure online. Be prepared to give names, birth dates, and Social Security numbers, along with other identifying information, for both you and your designated beneficiaries.
How to Manage Your 401(k) and IRA Beneficiaries
One of the most important assets in a person’s financial portfolio is often a retirement account, such as an IRA or 401(k). Managing the beneficiaries for these accounts is essential for a smooth wealth transfer.
Just like you would with life insurance, the first step is to gather your account statements, which documents specify your current beneficiary designations.
Think about who you want to inherit your funds and your long-term financial objectives. The majority of 401(k) and IRA providers allow you to manage your beneficiaries online. Log in to your account and navigate to the beneficiary area.
Typically, the website allows you to add, remove, or change beneficiaries. If you prefer to work with paper, get in touch with your plan administrator to obtain the necessary forms.
Why Relying on a Will Isn’t Enough
Here’s a major obstacle to watch out for.
A will is a significant component of estate planning, but it’s not a substitute for properly designated beneficiaries. A will specifies how you want your possessions to be divided when you pass away, however, it frequently must pass through probate—a drawn-out, costly, and public legal procedure.
In contrast, beneficiary designations typically bypass probate, allowing for a more straightforward and effective transfer of assets.
Additionally, beneficiary designations supersede a will. This means that even if your will specifies that you want your assets to go to a particular person, if the beneficiary designation on your account lists someone else, the funds go to the person designated on the account.
Seek Professional Guidance
Even though updating beneficiaries can be a fairly simple procedure, a smart move is to seek professional advice from a financial advisor. They can help you understand the ramifications of your beneficiary designations and confirm that your estate plan is thorough and current.
We’re Here to Help
Updating your beneficiaries shouldn’t be a one-time task. Reviewing your beneficiary designations on a regular basis—ideally once a year or whenever a major life event takes place—is crucial.
Don’t put off this important task.
At I.D. Financial, we realize that most families do not discuss money matters. That’s why we strive to help educate our clients to have a better understanding of how their money can work for them.
Ready to get started? Call (206) 774-0262, email paul@id-financial.com, or schedule online. We look forward to speaking with you!
About Paul
Paul Doak, CFP®, is the founder of I.D. Financial, a financial planning firm based in Bothell, Washington. He provides goals-based wealth planning and tax reduction strategies designed to align with each client’s unique life plans. With over 25 years of financial services experience, Paul is dedicated to simplifying complex financial matters and helping clients navigate life’s transitions with clarity and confidence. His approach begins with listening; as a sounding board for each client’s concerns and goals, he creates personalized strategies that reduce stress and allow them to focus on what matters most. Known for his responsive and educational style, Paul provides a judgment-free zone, focusing on the future rather than dwelling on past financial decisions.
A CERTIFIED FINANCIAL PLANNER® professional and Life Underwriter Training Council Fellow, Paul holds a bachelor’s degree in political science and economics from the University of Southern Maine. Based in Bothell, Washington, with his wife and son, outside of work, he enjoys skiing, reading, woodworking, traveling, fishing and camping with his son, and helping his son with Scouting. To learn more about Paul, connect with him on LinkedIn.