The beneficiary mistakes we see most

A beneficiary is the person or organization you name to receive money from a life insurance policy, an annuity, or a retirement account when you die. You name them on a form called a beneficiary designation.

That form is short. It is easy to fill out once and forget. And it can matter more than almost any other paper you sign, because it tells the company who gets paid.

We are not a law firm, and nothing here is legal or tax advice. But when we review policies with families, we see the same handful of mistakes again and again. Here they are, with what to do about each.

A free, printable beneficiary review checklist goes with this article. No email address needed.

1. The form was never updated after a big life change

This is a common mistake. Someone names a spouse, gets divorced years later, remarries, and never changes the form. Or a child is born and never added.

What happens to an ex-spouse named on a form depends on the law and the type of account. Washington’s insurance regulator, for example, says that after a divorce your former spouse generally cannot remain your beneficiary unless a court orders it or you submit a new form. But not every state works that way. And for many employer-sponsored plans, federal law can control instead. In Egelhoff v. Egelhoff, the U.S. Supreme Court held that a state rule automatically revoking a former spouse’s designation could not override the beneficiary named under an employer plan governed by federal law.

The lesson is simple. Do not count on the law to fix an old form. After marriage, divorce, a birth, an adoption or a death in the family, review every designation. If you are going through a divorce, ask your attorney what your settlement requires before you change anything.

2. Assuming your will controls the money

Many people believe their will decides who receives everything. For life insurance, annuities and retirement accounts, that is often not how it works.

The NAIC (National Association of Insurance Commissioners) explains that named beneficiaries receive the death benefit when the insured person dies. In the Egelhoff case, the Court described the plan’s duty to pay the beneficiary named in the plan documents. In practice, that means updating your will alone may not change who receives these funds.

How your will and your beneficiary forms work together is a question for your estate planning attorney. Bring copies of your beneficiary forms to that meeting.

3. Naming a minor child directly

It feels natural to name your children. But the NAIC notes that insurers often will not pay a minor directly. If a minor is named, a court may need to appoint someone to manage the money until the child is an adult. That can take time and cost money, and the person appointed may not be who you would have chosen.

The NAIC suggests considering a trust or other arrangement when the beneficiary is a minor. Which arrangement fits your family, and how to set it up, is a question for an attorney. Once your attorney sets it up, we can help make sure your beneficiary forms match.

4. No backup beneficiary

A primary beneficiary is the first in line. A contingent beneficiary is the backup, paid only if no primary beneficiary is living when you die.

If you name only one person and that person dies before you, the money may end up going to your estate. That can mean delay, court involvement, and an outcome you did not plan. Naming a contingent beneficiary is one of the simplest fixes on this list.

5. Unclear shares

If you name more than one beneficiary, say exactly what each one gets. The NAIC recommends stating the percentage for each.

Also think through what happens if one of them dies before you. Should that person’s share go to their children, or be split among the others? Forms often have options for this, and the wording matters. If your family situation is complicated, ask your attorney how the form should read.

6. Naming “my estate” without meaning to

Some people write “my estate” on the form, or leave it blank. Either way, the money may be paid to your estate. That can route it through probate, the court process for settling an estate, which may add time and cost. Whether naming your estate makes sense in your situation is a question for your attorney.

7. A trust that was never connected to the policy

Some people have an attorney create a living trust, then never update their beneficiary forms to match the plan. Or they change a form to name the trust without checking with the attorney first.

If your estate plan uses a trust, the beneficiary designations need to fit that plan. Whether a trust should be named as beneficiary of a life insurance policy, an annuity or a retirement account is a legal and tax decision. Your attorney decides the structure. We can help you carry out the insurance side: confirming what each form says today and submitting changes your attorney recommends.

8. Forgetting that retirement accounts follow their own rules

Retirement accounts, such as IRAs and 401(k)s, come with tax rules for beneficiaries. The IRS explains that for owners who died in 2020 or later, most non-spouse beneficiaries must generally empty an inherited account within 10 years. Spouses and certain other beneficiaries have more options.

Who you name can change how quickly the money must come out and how it is taxed. Talk with a tax professional before you choose or change a beneficiary on a retirement account.

9. Not telling anyone where the policies are

A policy only helps if someone knows it exists. Keep a simple list of your policies, the company, the policy number and how to reach the company. Tell your executor or a trusted family member where to find it.

On the tax side, the IRS says life insurance proceeds paid because of the insured person’s death are generally not included in gross income, though interest on those proceeds is taxable. Your beneficiaries may still want to talk with a tax professional.

How to do a beneficiary review

Once a year, or after any big life change:

1. Gather every policy, annuity and retirement account you own, including coverage through work.
2. Ask each company for a copy of the beneficiary designation on file. Do not rely on your memory.
3. Check each form for names, shares and contingent beneficiaries.
4. Compare the forms with your will or trust. If anything seems out of line, call your attorney.
5. Submit any changes to each company, and keep the confirmation.

Our beneficiary review checklist walks you through these steps. If you are getting ready for a meeting with your attorney or with us, the documents-to-gather checklist helps you pull everything together.

Where we fit

We help with the insurance side of your plan: reviewing what your policies and forms say, coordinating with your attorney, and making the changes they recommend. We do not draft wills or trusts, and we do not give legal or tax advice. We do not pay or receive referral fees from attorneys. Learn more on our estate coordination page, or book a conversation.