Beneficiary designations are official selections on financial accounts that indicate to whom the company should pay out benefits when an employee passes away. For instance, you may list your spouse as your beneficiary on your life insurance policy so that they get the money if something happens to you. People also use beneficiary designations on retirement accounts and other financial portfolios.
That seems straightforward enough, but people often make a critical mistake by forgetting to update these designations when necessary. It’s one of the most frequent mistakes with estate planning, and it often happens because people do not fully understand the power that these designations have.
The reality is that they overrule the rest of your estate plan. In order of priority, they take place first.
For instance, maybe you listed your spouse as the beneficiary, got divorced and then remarried, but never changed the benificiary’s name. When you wrote your will, you listed your new spouse and said that he or she should get the contents of your estate, including that life insurance policy.
However, if you pass away, the company pays the beneficiary first. The money never even enters your estate. The company does not care what your will says. They follow the directions you originally gave them. If you never updated those documents, your company is not bound by your will and won’t follow your estate plan.
This is just one example, but it helps to show how important it is to carefully consider all aspects of estate planning. Make sure you know what steps to take so that your true wishes are reflected in your plan.