You’ve probably come across the term “beneficiary” at least once in your life, and you might think you know what it means. But when you find yourself asked to name one, which usually happens when you want to set up a retirement account, life insurance or annuity, you’ll need all the information you can get.
So, what is a beneficiary exactly?
If you’ve been wondering about the answer to this question, then keep reading, because this blog post is your ultimate guide to what it means, who can be designated as one and when you need them.
What is a beneficiary?
In the general sense, this is a person who obtains a benefit from something. But what does a beneficiary mean in the financial world?
As a financial term, a beneficiary refers to an individual or an entity, who has the legal right to receive benefits, commonly in the form of monetary advantage, from a benefactor. In other words, this is the person you name to inherit your assets. This can include money, possessions and property.
Typically, these people are specifically named in the distribution document. However, if no such person is designated, the assets will either pass to someone who meets predetermined stipulations or directly into the benefactor’s estate.
What are the types of beneficiaries?
There are several types of beneficiaries that exist. Below, you can get acquainted with the main ones you can encounter in your life:
Primary vs contingent
Typically, beneficiaries are seen either as primary or contingent. The former type refers to the person (several people), who is first in line to receive any distributions from the assets – usually a close family member.
The latter type, the contingent beneficiary, is the person, who is second in line and is usually required as a backup option, in case the primary person proves unable to collect the benefit (deceased).
Sometimes, if the person who comes first in line is unable to receive their inheritance, you can arrange for the assets to be given to their children or to be distributed among your other primary choices, if any.
Revocable vs irrevocable
Another way your inheritors can be seen is as revocable and irrevocable. Revocable beneficiaries, which is the more common form, are called those that can be changed at any time, if needed. On the other hand, the irrevocable ones are permanent, and you won’t be able to change them, without their consent and this of all other people you have designated (both primary and contingent).
Who can be a beneficiary?
Generally, you can appoint anyone as your inheritor, but to give you a better grasp of who you can name as your beneficiary, below you can find a list of examples:
- A single person
- A group of people
- A trust
- A charitable organisation
- An estate
Of course, there can be certain exceptions, depending on your country of residence and the provider of the benefits. That’s why, before choosing your inheritor, it is recommended you check your state’s laws.
Minors can also be beneficiaries, but since they can’t hold property on their own until they come of age, if you want to leave your assets to a child, you may need to turn to a lawyer for help with the preparation of the required documents.
One way to ensure a minor receives their inheritance is to name a guardian that will hold the assets for them in custody. Another would be to use a trust, where the assets will be held, and specify the property to be given to the minor only when they reach a certain age.
When is a beneficiary needed?
Beneficiaries are mostly used by financial institutions when a person sets a retirement savings account (401Ks, IRAs, etc.), life insurance or annuity. Designating one is not mandatory, but usually, the whole reason behind this concept is to ensure that, once you die, your assets are put to use and go to your loved ones.
If you fail to appoint a beneficiary, who receives your assets will be unclear and the distribution of your funds will be put on hold. This will commence a lengthy and complicated process to determine where the benefit should go. Usually, if you haven’t named anyone, the assets will be given to the owner’s estate or will be distributed following the policy’s default order – first the spouse, then the children and the benefactor’s parents. Your assets may also end up held in probate.
Tips on how to designate a beneficiary
If you have found yourself in a situation where you have to designate heirs to your assets, before setting your mind on a particular person or entity, it would be good to consider a few things.
So, here are a few tips to keep in mind:
Prepare any identifying information in advance
Giving a person’s name or specifying how they are related to you (e.g. spouse) will not be enough. You will need to provide more detailed information, such as a social security number. This will help the financial institution to identify and locate the beneficiaries, and ensure your assets go to the right people.
Plan your contingent options
You never know what the future holds, so it is better to consider how you want your funds to be distributed if your primary beneficiaries die before you. Should your assets go to the children of those, who you designated as first in line, to your estate or perhaps to someone else?
Resort to the help of a financial advisor
Some aspects of naming beneficiaries can be confusing and complicated. Depending on the account or policy you are setting up, there might be additional factors you need to take into account. That is why to make sure you are doing everything right and your loved ones receive what is due to them, we advise you to seek the advice of a professional.
And finally, remember to keep your beneficiaries up to date. If your marital status changes, or you have children, it is very important that you update your options on time so that your assets end up going to the right people.