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What Is a Beneficiary Designation?

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  • Written By: Renee Booker
  • Edited By: E. E. Hubbard
  • Last Modified Date: 05 April 2014
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    Conjecture Corporation
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Life insurance policies and most retirements plans require the holder of the plan or policy to decide who he or she wishes to receive the proceeds upon his or her death by way of naming a beneficiary designation. The point of a beneficiary designation is to legally indicate, in writing, who will receive the proceeds of a life insurance policy or the funds accrued in a retirement account when the owner of the policy or account dies. There are a number of things a person should take into consideration before making a beneficiary designation, such as the tax consequences of the designation, as well as the effect it will have on a last will and testament. A person should also review all financial documents that include a beneficiary designation on a regular basis, as major life changes may call for beneficiary changes as well.

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The purpose of a life insurance policy is to provide financial security for one's loved ones in the event of the policy holder's death. As such, the policy holder must make a beneficiary designation when he or she originally takes out the policy. In most cases, a policyholder has the option to designate more than one beneficiary and/or to designate alternate beneficiaries. When more than one beneficiary is named, the proceeds of the policy will be split evenly among the beneficiaries. The purpose of an alternate beneficiary is in the event that the primary beneficiary is deceased at the time the proceeds are paid. A retirement account works in much the same way with regard to naming primary or alternate beneficiaries.

One advantage to passing assets through a beneficiary designation on a life insurance policy or other financial document is that the assets, or money, usually do not need to pass through probate. Normally, when someone dies, his or her assets must first go through the legal process of probate before they can be distributed to the beneficiaries. When a beneficiary is designated on a life insurance policy or retirement plan, he or she generally receives the funds shortly after the death of the maker without being included in the probate assets of the estate. Also, a beneficiary designation will almost always take precedence over any bequests in a last will and testament.

When deciding on who will be the beneficiary of a life insurance policy or retirement plan, the maker should carefully consider the issues involved. In most cases, a minor cannot be a beneficiary and, if an adult is made the beneficiary, there is no legal requirement that the adult use the funds for the benefit of the child absent additional legal maneuvers. In addition, the beneficiary designation will likely have tax consequences for the beneficiary, which should be considered before making the designation.

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