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Insurance

Naming a beneficiary can save your loved ones a lot of heartache — here's how to do it  

Naming beneficiaries ensures your assets are distributed according to your wishes.

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When it comes to our finances, most of us are focused on achieving our goals — whether that's a new home, an exciting vacation or a comfortable retirement. But naming beneficiaries on your accounts should be a part of the planning process, too. 

Without them, your estate could be tied up in court and your loved ones could be locked in a bitter dispute.

Designating beneficiaries is important for life insurance policies, annuities, retirement funds and bank and investment accounts. It can be an emotional process, forcing you to contemplate your mortality and examine your relationships. So, while you shouldn't put off choosing your beneficiaries, it's not something to rush through, either.

Find out how to designate a beneficiary, who can be one and what to consider when choosing yours.

What is a beneficiary?  

Simply put, a beneficiary receives your assets after you die. It can be an individual, a charity or a trust that you've set up. You can have one beneficiary for an account or other asset, or divide it among several.

Beneficiaries are different from heirs: Beneficiaries are specifically named, while heirs are people (typically relatives) who are legally entitled to inherit your assets if you die without a will.

The beneficiary of a life insurance policy receives the death benefit, or the amount paid out when you pass away. This is true for a policy you bought on your own, as well as any employer-sponsored insurance plans.  

The largest issuer of life insurance policies in the U.S., Northwestern Mutual earned an A++ from AM Best in 2023, a measure of its financial health and ability to pay out claims. It offers term, whole and universal life insurance and has issued dividends to policyholders every year since 1872.

Northwestern Mutual Life Insurance

  • Cost

    The best way to estimate your costs is to request a quote

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    Yes

  • Policy highlights

    As the largest life insurer by market share in the U.S., Northwestern Mutual is an established choice with a proven record. And, it offers a number of types of policies across the country. 

Another of CNBC Select's top insurance picks, Pacific Life scores high marks for its indexed universal life insurance policies, which build cash over time and have a guaranteed floor. Individualized plans are available to help with specific need, like supplementing retirement income.  

Pacific Life Life Insurance

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    The best way to estimate your costs is to request a quote

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  • Policy highlights

    Pacific Life offers permanent life insurance policies in addition to term insurance. A number of riders make it possible to customize the policy to fit your needs.

Many other financial products have beneficiary designations, as well, such as:

  • Checking accounts 
  • Savings accounts  
  • Certificates of deposit
  • IRA accounts (both Roth and traditional)  
  • Individual investment accounts 

The different kinds of beneficiaries

A primary beneficiary is your first choice to receive an asset. You may also be asked to name a contingent beneficiary, in case the primary is deceased or otherwise unable to receive it.

With stocks, bonds and other brokerage accounts, you can name a transfer-on-death beneficiary, who will automatically receive the assets in their account when you die. This can enable them to bypass probate, the sometimes lengthy legal process in which the court determines how to divide up your assets.

If the asset is a bank account, you can name a payable-on-death beneficiary who would enjoy the same privileges.

With life insurance policies and other assets, there are revocable beneficiaries and irrevocable beneficiaries. A revocable beneficiary can be changed at any time by the policyholder. An irrevocable beneficiary is extremely difficult to change and almost impossible without the permission of the existing designee.

Read more: What is estate planning?

A designated beneficiary for your retirement accounts would normally have to cash out within 10 years. There is also a class of eligible designated beneficiaries (EDBs) who are exempt from this 10-year rule, including the spouse or minor child of the deceased, a disabled person, a chronically ill individual or an individual who is no more than ten years younger than the account owner.

EDBs can take distributions from an IRA or other accounts, following guidelines from the IRS.

Who can be my beneficiary?

You can name almost anyone as a beneficiary — including an individual, a group of people, a charity, a business, a trust or even your own estate. There may be tax implications depending on your choice, however, and your benefits provider or state of residence may add certain restrictions.

Some states require residents to list their spouse as the beneficiary of certain accounts, or else get written permission to name someone else. Be sure to research your situation before naming any beneficiaries.

In addition to those limitations, there are some categories that estate planners recommend against naming as beneficiaries.

  • A minor. It's understandable to want to provide for your children, but they won't be able to receive any benefits until they're adults (typically age 18). Until that point, a court-appointed guardian is responsible for managing the assets. A trust would enable you to decide who oversees the account until the designee reaches adulthood.
  • A disabled person. If the individual receives government benefits, your generous gift could make them ineligible for assistance. A trust may be the right option here, as well. An estate planning attorney can help decide how to best support your loved one.
  • A pet. Your pet can't open a checking account or spend the money themselves. With a pet trust, however, you can designate a guardian for them, provide instructions for their care and leave funds for their wellbeing. You'll want to choose a remainder beneficiary for any funds left after your pet's death.
  • Your estate. You can name your estate as a beneficiary, though most estate planners advise against it. While it can ensure there's enough money to pay off your debts when you die, it would remove any protection the estate had against creditors. It could also lead to higher taxes and legal fees and give leverage to anyone wanting to contest your will.

When designating a beneficiary, you can name one person to receive the entire amount or assign percentages to various people. For example, you could name your four children as equal beneficiaries of your life insurance policy, with each receiving 25% of the death benefit.

What to think about when choosing a beneficiary

Deciding who to name as a beneficiary is serious business and you should give it a lot of thought.

Consider the individuals and organizations in your life. Which family members or other loved ones will need support after you're gone? What causes do you care about and want to make part of your legacy?

Tell someone you're making them a beneficiary. You'll probably need some financial information from them and, if something happens to you, they'll be able to access the funds promptly.

The bequest can be declined. You can't refuse to be a beneficiary, but you can reject the assets left to them, known as disclaiming an inheritance. In this case, the assets would go to the contingent beneficiary or, barring that, back to the estate to be reallocated.

Your decisions could be contested. Surviving family members or others could challenge who you named as a beneficiary for a variety of reasons, including claiming there was undue pressure. Assigning an irrevocable beneficiary could give you peace of mind that your money will go to the person you chose. You may want to talk with an estate planner first, as these designations typically cannot be changed.

Your beneficiaries list should be consistent with your estate planning. Your beneficiary designations supersede whatever is in your will. Even so, make sure that the beneficiaries on your accounts match those named in your will to avoid any confusion or delays.

How to designate a beneficiary 

You'll basic information from your designee, including their full legal name and their relationship to you. Some accounts may require their address, phone number and Social Security number, as well.  

Providing accurate information to insurers and financial institutions could mean the difference between a swift payout or years of waiting.

Most life insurance companies require beneficiaries to be named when you buy your policy, although you can always add or change a designation later. If you receive life insurance through your job, check with your human resources department about how to add or change a designation.

For other accounts, you can typically name a beneficiary when you open or at any time thereafter. Most companies will allow you to make or change designations online, though some may require a written request.

When should you update your beneficiaries? 

Naming a beneficiary probably won't be a one-time thing. Consider making updates when you have life changes — if you get married or divorced, have a child, get a new job or move into a new home.

You also may have set up a trust, and want to name that as a beneficiary, since that can help make transferring property simpler.   

What happens if I don't name a beneficiary?

If you don't name a beneficiary for an account, your estate could be tied up in probate for months or even years. That's a time your loved ones won't be able to access money you've left them, which can be tragic if they're counting on those funds for support.

Death benefits from a life insurance policy with no living beneficiaries are paid out to the insured's estate. The payout on a group life insurance policy without a beneficiary usually follows a payment order that starts with a spouse, then any children or living parents and finally the estate.

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Bottom line

Naming a beneficiary makes sure your assets go where you want them to, rather than tied up in court. It's an emotional process, though, and should be considered carefully.  

Why trust CNBC Select?

At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every personal finance review is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of personal finance products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics.

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Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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