What is a Beneficiary? Everything You Need to Know

A beneficiary is an individual, institution, trust, or estate designated to receive assets or benefits upon the death of an individual. This designation is common in life insurance policies, retirement accounts, and other financial instruments.

In this guide, you'll learn:

The different types of beneficiaries
How to name a beneficiary
Changing beneficiaries
Beneficiaries in retirement plans
Beneficiaries in life insurance
How beneficiary designations work after death

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John Ramsey

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Updated on

June 27, 2024

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Beneficiary

Types of Beneficiaries

There are several types of beneficiaries, each serving a specific purpose:

Primary Beneficiary: The first in line to receive assets or benefits.
Contingent (or Secondary) Beneficiary: Receives assets if the primary beneficiary cannot or will not accept them.
Tertiary Beneficiary: Receives assets if both the primary and contingent beneficiaries are unable to.

How to Name a Beneficiary

Naming a beneficiary is typically straightforward:

Complete the beneficiary designation form: This form is provided by the financial institution or insurance company.
Provide required information: This includes the beneficiary's full name, date of birth, Social Security number, and relationship to you.
Submit the form: Return the form to the institution or company.

Changing Beneficiaries

You can change your beneficiaries at any time by completing and submitting an updated beneficiary designation form. It's essential to keep your beneficiaries current, especially after major life events like marriage, divorce, or the birth of a child.

Beneficiaries in Retirement Plans

In retirement plans like 401(k)s or IRAs, beneficiaries receive the remaining assets in the account after the account holder's death. The beneficiary may have options for how to receive these assets, depending on the type of plan and their relationship to the deceased.

Beneficiaries in Life Insurance

In life insurance policies, the death benefit is paid to the named beneficiary upon the policyholder's death. This provides financial support to loved ones or can be used to cover expenses like funeral costs or outstanding debts.

How Beneficiary Designations Work After Death

After your death, the financial institution or insurance company will contact your named beneficiaries and guide them through the process of claiming their benefits. They will typically need to provide a certified copy of the death certificate and complete any required paperwork.

Conclusion

Understanding beneficiaries is crucial in financial planning. Proper beneficiary designations ensure that your assets are distributed according to your wishes after your passing. It is essential to review and update these designations regularly to reflect your current circumstances.

For more insight into how beneficiary designations interact with estate planning, see our detailed guide on Estate Planning, which further explores the distribution of assets and wealth transfer strategies.

Beneficiary FAQ

What is the difference between a primary and contingent beneficiary?

A primary beneficiary is the first person or entity in line to receive assets or benefits when the policyholder or account holder passes away. A contingent beneficiary, also known as a secondary beneficiary, is the person or entity who receives the assets or benefits if the primary beneficiary cannot or will not accept them.

Can I change my beneficiaries?

Yes, you can change your beneficiaries at any time by completing and submitting an updated beneficiary designation form provided by your financial institution or insurance company.

Do I need to name a beneficiary for my life insurance policy?

Yes, naming a beneficiary for your life insurance policy is crucial to ensure that the death benefit is paid to the person or entity you intend after your passing. If you don't name a beneficiary, the death benefit might be subject to probate court, which can be a lengthy and costly process.

What happens if I don't name a beneficiary for my retirement account?

If you pass away without naming a beneficiary for your retirement account, the assets in the account will likely go through probate court, and the distribution may not align with your wishes.