After you have purchased an annuity, life insurance policy, and named your beneficiaries you might never look back. This could be a huge mistake.
Your ex-spouse will get the proceeds if you divorce and remarry, but you fail to change your beneficiary to your current spouse. Other life events, such as divorce or death, can be grounds for reviewing beneficiaries.
You may also want to include new people in your family, such as grandchildren. Perhaps there is a charity that you would like to support.
It is important to know the workings of primary and contingent beneficiaries before making any changes.
Your spouse is your primary beneficiary if you are married. Your child or children will be contingent beneficiaries if your spouse dies before you do. If your primary beneficiary passes away before you, or at the same moment as you, the proceeds will be distributed to the contingent beneficiaries.
Although you must notify your insurer about the death or disability of a primary beneficiary you can still make sure that the proceeds go to your contingent beneficiaries.
Fairness among generations
The issue is more complicated if you have many grandchildren.
Let’s say you are married with three children. Your spouse will be the primary beneficiary. You can also name your children contingent beneficiaries so that they share equally in the proceeds.
Here’s where things get complicated. Let’s say that child A has three children and child B has none. Child C has two. This gives us a total of five grandchildren.
What happens if your spouse and your child C both die? If you haven’t set up your beneficiaries properly, then all proceeds would go to your two remaining children. The two children of Child C would be disinherited.
This is not what most people want.
You can also specify that your share will be distributed to the children of the deceased child. This is known as a per Stirpes Distribution.
This means that each family member will get an equal share. You can request per stripes if you wish to do this. Equal distribution (per capita), is the default.
Most insurance companies offer per stirpes designations, but not all.
Beneficiary designations can override your will. So make sure you get them right
Annuities, life insurance policies, and retirement plans all list beneficiaries so they bypass probate court. This means that your will doesn’t decide who gets the proceeds. That is why it is important to have the right beneficiaries.