Certainly, a big part of putting together any life insurance
plan is choosing who the beneficiary will be. Depending on the purpose of the
policy, that person or entity could be a spouse, child, business partner or
charitable organization, just to name a few.
And when we set up our life insurance plans, just like any
other type of financial planning situation, we don't do it in a vacuum. In
other words, it happens during just one point in time — and as we all know
well, life continuously goes on.
Just like with any other type of life stage planning, life
insurance policies need to be reviewed regularly in order to make sure that the
beneficiary you chose at a particular point in time is still the right choice
today. Otherwise, it could cause some major issues when the time comes to pass
on these assets.
That Was
Then, This Is Now
Think about it for a minute. Proceeds that are payable to an
already-deceased relative, a former spouse or partner, or to all but just one
of your children. When life changes, it means that the beneficiary designations
on life insurance policies — as well as other plans like IRAs and 401(k)
accounts — should be reviewed and changed if the person or entity that you
chose, while appropriate at one time, is no longer the best fit to be
beneficiary. And, if you think that the named beneficiary will simply do what's
right and hand the money over to the person who you really want to have it,
think again.
Here are some of the
most common life changes that might require you to take a look at your
insurance policies:
Birth or adoption of a child or grandchild. If you are
planning for the birth or adoption of a child or a grandchild, you should take
a look at your life insurance policy beneficiary form and see how it is worded.
In some cases, if you are naming children or grandchildren, it may simply state
that you are naming "all children" or "all grandchildren."
In other cases, though, it could name the kids or grandkids individually.
Therefore, if you don't want to unintentionally disinherit someone, it's
important to review your policy before the child arrives. Otherwise, someone
could be left out.
Change in marital status. A change in marital or partnership
status should also be a trigger for you to take a look at your life insurance
policy. It's important to note that in some states, if you are getting
divorced, you may not be able to change the beneficiary designation until the
divorce is actually final. In some cases, it may also be required that the original
beneficiary consent to his or her name being removed from the policy.
Your named beneficiary predeceases you. You may have named
someone as your beneficiary who ends up predeceasing you. In this case, you
might have also named a contingent beneficiary. This is someone who will be
next in line to receive the policy's funds. However, if you really do not
intend for this person to receive all of the funds, you may want to take
another look at your plan and update it.
Other situations. There may be other situations that will
spur you to review your policy — you might just simply change your mind or have
a falling out with your original choice for the beneficiary. In other cases,
various needs may have changed.
Remember when you're reviewing your life insurance policies
to look at both individual and group plans. This is because if you have a life
insurance group plan through your employer, often these plans are forgotten
about — but they could be worth a nice amount of money for a beneficiary, too.
When to
Check Your Plans
Just as you do with your investments, it is important to go
through and review your insurance coverage on a regular basis. In most cases,
this should occur at least once per year — or even more often if a major life
event has taken place.
Meeting regularly with your insurance advisor can help
ensure that your plans are all in place for covering those you intend to with
the proper amount of benefit going forward, as well as for making sure that
those you no longer intend to provide coverage for aren't listed on your
policies. This is not just good financial planning, it also can help to prevent
family misunderstandings in the future.