Beneficiary basics: Helping employees understand their choices and make informed decisions

September is Life Insurance Awareness Month (LIAM)

According to a Forbes Advisor survey, respondents were confused about who could be a beneficiary, with only 58% believing a spouse could be designated.¹ LIAM is an ideal time to educate employees about the importance of naming beneficiaries and keeping them current — so their benefits transfer according to their wishes. Share these employee-focused beneficiary resources:

• Consumer blog articles:
  • Six reasons to get life insurance through your workplace
  • Beneficiaries: Who gets your assets?
• Voya Learn on-demand video: Beneficiaries

Do your employees know the implications of naming a minor as a beneficiary — or what happens if they don't name a beneficiary at all? Helping employees understand the beneficiary basics ensures their life insurance policy benefits, retirement account assets, and Health Savings Account (HSA) funds go to the right people if the employee passes away.

Given life insurers paid out more than $89 billion in death benefits in 2023, this is no small matter.² Encouraging employees to review and update their beneficiary information regularly can also help relieve busy HR staff workloads. Doing so encourages the claims and distribution processes to run smoothly, providing employees’ loved ones with timely access to the benefits and support they may need during a difficult time.

Understanding beneficiary choices

When it comes to designating beneficiaries, details are key. You want to ensure employees understand how the beneficiary process works, why keeping beneficiary information updated is essential, and what's at stake if no beneficiaries are named.

This information can help your employees understand these roles and communicate the expectations more effectively:

• Primary Beneficiary: The first choice — or primary beneficiary — can be one person or multiple people. They are first in line to receive an insurance policy death benefit, or the funds held within a retirement account or HSA. The percentage interests of all primary beneficiaries must add up to 100%. For married employees with a 401(k) or pension plan, their spouse is the primary beneficiary by default, unless a spousal consent form is signed waiving this right. This rule can also apply to HSAs.
• Contingent Beneficiary: Secondary or contingent beneficiaries will receive the death benefit, retirement or HSA funds if the primary beneficiary/beneficiaries don’t qualify as a beneficiary under the policy or have already passed away. The percentage interests of all contingent beneficiaries must add up to 100%.
• None of the above: If employees don't name an account beneficiary, there are a few possible routes for death benefits or account funds. Typically, the proceeds will go to the deceased's estate.

If no beneficiary is designated, a probate court may decide who will receive the funds, per the deceased’s will, if there is one. It's worth noting that the probate process can be lengthy.

The insurer or plan custodian may also use a pre-determined order of beneficiaries to determine who receives the funds. If an employee hasn’t designated a beneficiary, the death benefit will be paid as outlined in the certificate of coverage or governing plan documents. As an example, the benefit payment order may start with the spouse, then move on to children — or proceeds could be paid to the estate. Either way, if employees don't name their beneficiaries, or have a will, they don't get to decide who receives their assets.

Who can be a beneficiary?

A beneficiary can be anyone the employee wants it to be — a spouse, a sibling, a friend, a child or grandchildren (although the rules are usually different if the child is a minor — see below), or even a charitable organization or a trust. One thing to keep in mind is that in so-called “community property” states, the employee may be required to name their spouse (if they have one) as the beneficiary, unless the spouse consents to naming someone other than them. These states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.³

Some important considerations

The circumstances of beneficiaries can also make receiving benefits or assets more complicated. As employees contemplate whom they'd like to receive their death benefits and account assets, they should consider the following factors:

• If they want to name a child as a beneficiary: Most insurance companies won’t pay proceeds to minors. Money could go into a state-owned trust until the child becomes an adult or until a custodian is named. Even if naming a minor as a beneficiary is allowed, additional court documentation may be needed to access the benefit payment.

Retirement accounts and HSAs have similar restrictions. Neither allows minors to be named as beneficiaries; instead, the plan custodian appoints a guardian to hold and manage the funds until the beneficiary turns 18.

Consulting with a legal advisor makes sense if employees want to name a minor as a beneficiary. That way, they can plan for any complexities and make their beneficiary designation work with their broader wills and estate plans.

• If they want to name someone with special needs as a beneficiary: If employees have dependents with special needs, they may understandably wish to designate them as beneficiaries.

However, receiving additional income from a death benefit, retirement account or HSA can change the amount of government benefits a person with special needs receives. Employees should consider consulting a legal advisor to create a special-needs trust. Such trusts can help adequately protect beneficiaries over the long term.

When to review beneficiary designations

Selecting beneficiaries is not a one-and-done task but something employees should review regularly. You can also recommend that they update their beneficiary designations after major life events, including: 

• Marriage or divorce
• Childbirth or adoption
• Loss of a loved one

By reviewing their designations, employees can help ensure their life insurance, retirement accounts, and HSA beneficiary selections align with their wishes and reflect their current family circumstances. These assets are an essential part of employees’ financial lives and can provide invaluable support in the event of a death.

Have questions about beneficiary designations? Connect with your Voya representative today.