What Is a Beneficiary?

What Is a Beneficiary?

A beneficiary is someone who inherits assets from your financial accounts or life insurance policy after your death. Beneficiaries can be individuals, such as your spouse or children, or legal entities like a trust, a corporation or a favorite charity.

How Do Beneficiaries Work?

You typically name your beneficiary directly on your financial accounts. For example, when you purchase a life insurance policy, you'll be asked to choose a beneficiary to receive the death benefit after you die. In addition, you can often select a beneficiary for the following kinds of financial accounts:

• Brokerage accounts
• Retirement accounts like 401(k)s and individual retirement accounts (IRAs)
• Health savings accounts (HSAs)
• Checking accounts
• Savings accounts
• Certificates of deposit (CDs)
• Money market accounts

Some accounts must be set up as payable-on-death (POD) accounts to name a beneficiary; check with the account provider.

After your death, the assets in the account go directly to your chosen beneficiaries and avoid probate, a lengthy and potentially costly process in which the court oversees distribution of your assets. Designating beneficiaries can help your loved ones access money they need more quickly than going through probate.

Tip: Beneficiary designations usually take precedence over instructions in your will, so it's important to keep them up to date.

Learn more: What Is Probate?

Types of Beneficiaries

You can name different types of beneficiaries depending on who you want to receive your assets.

Primary Beneficiaries

The primary beneficiary is the first in line to receive the assets or insurance payout after your death. You can name one person or entity as the primary beneficiary, or have multiple primary beneficiaries.

Contingent Beneficiaries

Think of contingent or secondary beneficiaries as alternates or backups. The contingent beneficiary receives your assets if the primary beneficiary has passed away, can't be located or is otherwise unable to take ownership.

Multiple Beneficiaries

You can name more than one beneficiary and divide your assets or death benefit among them. You must specify the percentage each beneficiary receives, and these percentages should add up to 100%.

Example: If you're married with two children, you might name your spouse and two children as multiple beneficiaries, giving 50% of an asset to your spouse and 25% to each child.

Benefits of Having a Beneficiary

Naming a beneficiary benefits your surviving loved ones in several ways.

• Avoids probate: Your assets transfer directly to your beneficiaries, without the need for a probate court to get involved.
• May save money: Choosing beneficiaries can eliminate potentially costly probate fees.
• Speeds up payouts: Beneficiaries can receive funds faster so they can cover day-to-day expenses.
• Can reduce conflict: Providing clear instructions as to who gets what assets can help prevent disputes.
• Helps ensure your wishes are followed: Naming a beneficiary puts you in control of who receives your assets.

Learn more: What Is Estate Planning?

Who Can Be a Beneficiary?

You can name a variety of people or entities as beneficiaries. Common choices include:

• Your spouse or partner
• Your adult children
• Friends
• Other relatives
• Charities
• Trusts
• A business entity

Learn more: What Is a Living Trust?

How to Choose a Beneficiary

When selecting a beneficiary, consider the following:

• Your goals: For instance, if your life insurance is intended to help your family business stay afloat without you, the business entity should be the beneficiary.
• Financial needs: Who depends on you financially or would benefit the most from the asset?
• Legal restrictions: State laws or your financial provider may restrict who can be named as a beneficiary. For example, in community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin), your spouse is generally your primary life insurance beneficiary by default. If you want to choose someone else as beneficiary, you will need your spouse's written consent.
• Financial responsibility: If you want to leave money to someone who may not manage it well, you can create a living trust, designate the trust as beneficiary and choose a trustee to manage the funds for the beneficiary.
• Beneficiary age: In many jurisdictions, minors can't be beneficiaries. If you want a child or grandchild to receive benefits, you can create a living trust to serve as beneficiary and name a trustee to manage the assets on the child's behalf.
• Tax implications: Depending on their relationship to you and the account type, your beneficiaries may owe taxes on assets they receive. An estate planning attorney can advise you on choosing beneficiaries in a way that minimizes their tax obligations.

Learn more: Do You Need an Estate Planning Attorney?

How to Designate a Beneficiary

Naming a beneficiary is usually a simple process and can often be done online.

1. Gather Information

Have the account or policy number for each financial account or life insurance policy ready. Visit the company's website and log in to your account or contact the company by phone to get beneficiary designation forms.

2. Review Beneficiary Options

Make sure you understand the options available for naming beneficiaries, such as primary, contingent or multiple beneficiaries.

3. Consider Your Intentions

Thinking about how you want your assets distributed and why will help guide your choice of primary and contingent beneficiaries. If you're naming more than one beneficiary for an account or policy, figure out the percentage each beneficiary should get.

4. Complete the Necessary Paperwork

Follow the directions for filling out the beneficiary designation form. You'll generally need to include the beneficiary's full legal name and may also need their Social Security number, date of birth, contact information and relationship to you.

5. Keep Beneficiary Designations Up to Date

To ensure your beneficiary designations reflect your current wishes, review them annually and after major life changes, such as marriage or divorce, the birth of a child or the death of a beneficiary.

Tip: When choosing multiple beneficiaries, list them each by name, not as a group. Vague designations such as "my children" can lead to legal disagreements. Does that term include stepchildren, adopted children or children you had outside of marriage?

Frequently Asked Questions

The Bottom Line

Choosing beneficiaries for your financial accounts, life insurance policies and other assets helps to ensure that your wishes are honored and your loved ones are financially secure after you die. Making and regularly reviewing your beneficiary designations is an important part of managing your financial life, along with checking your credit report and scores. Your family can't inherit your credit score, but keeping your credit in good shape can give you access to loans, credit cards and other tools that can help you build the life you want for them.