Did you list your spouse as your beneficiary when you first signed up for a 401(k) at work? Maybe you have a child listed as a Payable on Death recipient on your bank account. Did you make these decisions back when your kids were in diapers? Beneficiary designations and life insurance policies are simple ways to protect those that mean the most to you. Take the time to ensure beneficiary information is correct and your life insurance policy is sufficient — it’s worth your time.
Understanding Beneficiary Designations
Beneficiary designation is the formal act of specifying who should receive your assets or benefits when you pass away. Retirement accounts and life insurance policies are common places you need to designate a beneficiary; annuities, bank accounts, and estate planning processes are other examples of where you will outline beneficiaries.
There are several reasons why beneficiary designation is important:
Asset Distribution: Without clear instruction, your assets could land in the lap of someone you did not intend. This is why clear instructions are encouraged so the decision does not fall onto the court system.
Efficiency: Handling a loved one's passing is stressful, but clear beneficiary designation can help move the process along in a far more efficient manner and reduce decision-making for those handling your estate.
Tax considerations: Proper planning and designation can help minimize tax liabilities, preserving more of your wealth for your loved ones.
While assigning a beneficiary in these various scenarios is crucial, it’s just as important to keep the information up-to-date. You may want to make changes when you get married, when your children are born, or if you get divorced. While you’re at it — get specific — child, children, or spouse are terms that often aren’t specific enough — always add specific names wherever possible. Don’t forget, that you can also list charitable organizations as beneficiaries, this is another instance where using a complete and proper name is helpful to ensure a smooth transfer of funds.
The Role of Life Insurance in Financial Protection
Life insurance is a contract between you, the policyholder, and the company you purchase the policy from. The policyholder pays a monthly premium in exchange for a payout upon the holder’s death, amongst other possible benefits. As you know, the goal is to provide financial protection for those you leave behind.
Everyone is different, which means you have to choose the right policy to achieve the financial protection you have in mind. The breadwinner of a family may choose a policy with a higher payout to help cover lost wages. While that scenario is common and likely obvious, don’t undermine your value if you are not the breadwinner. A parent who manages a household by transporting kids, shopping for groceries, cooking and cleaning is very valuable. It’s important to realize that the loss of such a parent could lead to increased childcare expenses and other expenses to maintain your home life.
To pick the appropriate life insurance policy, you must understand the various types:
Term life insurance: Provides coverage for a specified number of years and provides a payout should the policyholder pass away during the said time frame.
Whole life insurance: Provides lifelong coverage with savings or cash value components that grow over time.
There are many other policies available including but not limited to universal life insurance, final expense insurance, mortgage protection insurance, and variable life insurance.
When considering life insurance, think about the future of your spouse, children, and grandchildren. Deciding whether or not to purchase a life insurance policy may be one financial decision where it’s okay to lead with your heart. It’s hard not to want the best for your loved ones’ future.
Avoid Common Pitfalls to Help Protect Your Loved Ones
Forgetting to designate a beneficiary altogether or letting a term life insurance policy lapse are among the most common pitfalls associated with protecting your loved ones. There are also less obvious pitfalls like tax implications and not updating your life insurance policy or beneficiaries as your family, financial circumstances, and goals evolve.
As you can see, beneficiary designation and life insurance are two great ways to protect your loved ones. But just like a good financial plan, you need to build in flexibility. If your beneficiary selection is a little foggy or you chose a life insurance policy during a different stage of life, it's likely time to take a closer look. If you agree, reach out, we can help you build protection for your loved ones into your financial plan.
About Integrated Wealth Management
Integrated Wealth Management is owned by Burt Hutchinson, CPA, CFP®. We’re a CPA-led organization, meaning we’re here to handle your complex tax scenarios and provide cost-saving insight related to your financial plan.
We’re here to guide you through the 3 stages of retirement:
Uncertainty Stage: When you are within 10 years of retirement and have questions about how to make it work
Stability Stage: When you have reached the financial milestone to retire comfortably and confidently
Reflection Stage: When you are looking to leave a legacy
We are also here to provide experienced, empathetic support during times of loss, such as the death of a life partner. You need confidence and a sense of security to enjoy retirement. As fiduciaries with a fee-only structure, we never receive commissions. Free of ulterior motives, you can be sure we’re focused on your goals.
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Disclosure Statement:
This presentation is not an offer or a solicitation to buy or sell securities. The information contained in this presentation has been compiled from third-party sources and is believed to be reliable; however, its accuracy is not guaranteed and should not be relied upon in any way whatsoever. This presentation may not be construed as investment, tax, or legal advice and does not give investment recommendations. Any opinion included in this report constitutes our judgment as of the date of this report and is subject to change without notice.
Additional information, including management fees and expenses, is provided on our Form ADV Part 2 available upon request or at the SEC’s Investment Adviser Public Disclosure website, Past performance is not a guarantee of future results.