What Is a Beneficiary?
If you've ever purchased life insurance, opened a retirement account, or started putting together an estate plan, you've probably come across the word beneficiary. You may have even named one without giving the decision much thought at the time.
A beneficiary is a person or organization designated to receive money, property, or another benefit. For example, if you name your daughter on your life insurance policy, she's the beneficiary who may receive the insurance payout when you die. If you leave your home to your brother in your will, he may be a beneficiary of your estate.
Who you name matters because beneficiary designations can determine where money goes after your death. They can also affect how certain assets are transferred and who has a right to receive them.
Understanding how beneficiaries work can help you make informed decisions about your own accounts and estate plan.
Where Are Beneficiaries Used?
Beneficiaries are commonly named on life insurance policies, retirement accounts, and certain financial accounts. They're also included in wills and trusts.
The rules depend on the type of asset. Life insurance companies generally pay the person named on the policy, while retirement account providers follow the beneficiary designation on file, subject to applicable rules. A will identifies people who are intended to inherit property through the estate.
Here's an example. You open a retirement account when you're 30 and name your spouse as the beneficiary. Twenty years later, you have two children and want them to inherit that money instead. Unless you update the designation, your spouse may still be listed to receive the account.
This is why it's worth knowing which accounts have beneficiaries and checking the names on file from time to time. You may have made those decisions years ago, when your circumstances looked very different.
What Are Primary and Contingent Beneficiaries?
When you name a beneficiary, you may have the option to identify both a primary beneficiary and a contingent beneficiary.
A primary beneficiary is your first choice to receive the benefit.
A contingent beneficiary is your backup choice if the primary beneficiary can't receive it under the applicable rules.
For example, you might name your spouse as the primary beneficiary of your life insurance policy and your daughter as the contingent beneficiary. If your spouse dies before you, your daughter may receive the proceeds, depending on the policy and the circumstances.
You can also name more than one primary beneficiary. Suppose you want your two children to share a life insurance payout equally. You may be able to name both children and assign each 50% of the benefit.
Think about what you'd want to happen if one of those children died before you. Would you want the surviving child to receive the entire amount, or would you want the deceased child's share to go to their children? The answer depends on your wishes and the options available under the policy or account.
Reviewing these details when you name beneficiaries can help make your intentions clearer.
Does a Beneficiary Have to Be a Family Member?
No. Depending on the type of account or policy, you may be able to name a friend, an unmarried partner, a charity, or another eligible person or organization.
For example, someone who has been in a long-term relationship without marrying may want to name their partner as the beneficiary of a life insurance policy. Another person may want a portion of their estate to go to a nonprofit organization they've supported for years.
You can also name someone who depends on you financially. If that person is a minor child or receives needs-based government benefits, though, the arrangement deserves additional consideration.
A minor generally can't manage a substantial inheritance independently, so arrangements may be needed to manage the money until they're legally able to do so.
An inheritance may also affect eligibility for certain income- or asset-based benefits. In these situations, an estate planning attorney can explain the available options for your circumstances.
The important thing is to consider both who you want to receive the money and what receiving it could mean for them.
How Does a Beneficiary Designation Affect a Will?
This is an area where people can easily get confused.
Some assets pass according to a beneficiary designation rather than through your will. Life insurance and many retirement accounts are common examples.
Imagine your will says you want your estate divided equally between your two children, but your life insurance policy names only one child as the beneficiary. The policy's proceeds will generally go to the named beneficiary, assuming the designation is valid and the beneficiary is eligible to receive the payout. The will usually won't change that designation.
The same issue can arise after a marriage, divorce, or other major family change. Your will and your account records may reflect different decisions because they were completed at different times.
That's why reviewing your estate planning documents alongside your financial account designations is important. Each part of your plan should reflect what you currently want to happen, and the different pieces should work together as intended.
What Happens If a Beneficiary Dies Before You?
If someone you've named as a beneficiary dies before you, the next step depends on the asset, the beneficiary form, and the applicable rules.
If you've named a contingent beneficiary, that person may receive the benefit. If you haven't named a backup, the money could pass to another eligible beneficiary under the account's rules or be handled through your estate.
For example, suppose you named your son as the sole beneficiary of a retirement account. He later dies, and you never update the account. You might expect his children to inherit the money, but that outcome isn't automatic in every situation.
Some accounts allow you to specify how a deceased beneficiary's share should be handled. Others follow particular rules for determining who receives the funds. Checking the account's requirements can help you understand what would happen.
It's worth reviewing your beneficiary designations after a death in the family, a marriage, a divorce, the birth of a child, or another major life change. Even a quick review can help you spot a designation that no longer reflects your wishes.
What Should You Review When Naming Beneficiaries?
Start by identifying the accounts and policies that allow you to name beneficiaries. Check the names listed, confirm the intended shares, and see whether you've named contingent beneficiaries where appropriate.
Pay attention to older accounts, too. You may have opened a retirement account through a previous employer or purchased an insurance policy many years ago. Those records can be easy to overlook when your financial life changes.
If you want to divide a benefit among several people, make sure the percentages reflect your intentions. If you want a child's inheritance to be handled in a particular way, find out what arrangements are available. And if you're naming someone whose circumstances could make receiving money complicated, consider getting professional guidance before completing the designation.
Keep a record of the institutions where your accounts are held and where your beneficiary paperwork can be found. You don't need to include account passwords or other sensitive information in that record. The goal is to make it easier for you, or someone handling your affairs, to locate the relevant information when it's needed.
Final Thoughts
Beneficiaries play an important role in deciding who receives money and property. The people you name may depend on the stage of life you're in, your family relationships, and the kind of support you want to provide.
Take time to review the designations you've already made. Check that the names are current, that the shares reflect your wishes, and that you've considered what should happen if your first choice can't receive the benefit.
These decisions are part of keeping your estate plan aligned with your life as it is today.
Up Next: Knowing what a beneficiary is gives you a starting point. Choosing who to name takes a little more thought, especially if you have several people you want to provide for or need to decide how your assets should be divided.
In the next article, we'll look at what to consider when making those choices and how to account for changes in your family or financial circumstances.
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