Beneficiary definition

A beneficiary is an individual or group that receives benefits, advantages, or profits from something, often in the context of the financial world. In an estate plan, beneficiaries are named to inherit money, assets, or other possessions after the grantor's passing. For instance, if a person passes away and their will indicates that their assets should be distributed among their children, those children would be considered the beneficiaries. 

Common examples of assets that can have designated beneficiaries include life insurance policies, retirement accounts, bank accounts, and other investment accounts.

By naming a designated beneficiary, the account owner ensures that their assets will be transferred directly to the chosen person according to their wishes after their death. 

How it works

When you establish a financial account or a life insurance policy, for instance, you are usually asked to name a beneficiary. This is the person or entity that you want to receive the benefits or assets from that policy or account after you pass away.

This beneficiary designation is very important because it typically overrides any instructions left in a will. For example, if you have a retirement account and have named your child as the beneficiary, but your will states that all your assets should be divided equally among all your children, the retirement account will go directly to the named beneficiary, not divided as per the will.

One key point to remember is that beneficiary designations should be reviewed and updated periodically, especially after major life events like marriage, divorce, or the birth of a child.

If a beneficiary is not named, or if the beneficiary predeceases the account or policy owner, the assets typically become part of the estate and are distributed according to the person's will or, if there is no will, according to state law.

In conclusion, beneficiaries are an essential part of estate planning, and they determine who receives specific assets after a person's death.

Types

There are several types of beneficiaries, depending on the nature of the asset or benefit being transferred. Here are some common types:

These types of beneficiaries can be used in various combinations, depending on the owner's wishes and the specific financial instruments or estate planning tools being used. It is essential to consult with a financial planner or estate attorney to ensure your assets are distributed according to your wishes.

Examples

FAQs

What Is a Beneficiary?

A beneficiary is a person or entity chosen to receive assets, money, or benefits from someone else, usually after the person's death. Examples include receiving money from a life insurance policy, inheriting property from a will, or getting funds from a retirement account. Beneficiaries can be family members, friends, charities, or other organizations.

What Happens If I Don't Choose a Beneficiary?

If you don't choose a beneficiary for your assets, such as life insurance, retirement accounts, or property, the default rules set by the specific account, policy, or the law in your jurisdiction will determine how your assets are distributed upon your death.

In many cases, if you don't designate a beneficiary:

For life insurance and retirement accounts, your spouse may automatically be considered the beneficiary, or the assets may go to your estate if you don't have a spouse.

If the assets become part of your estate, they will be distributed according to your will, if you have one. If you don't have a will, the assets will be distributed based on the intestacy laws of your state or country, which typically prioritize your spouse, children, and other close relatives.

The probate process will be involved in distributing your assets, which can be time-consuming, expensive, and public.

To avoid potential complications and ensure your assets are distributed according to your wishes, it's essential to designate beneficiaries for your accounts, policies, and other assets, and review them periodically.

How Difficult Is It to Designate a Beneficiary?

Designating a beneficiary is generally not difficult. The process typically involves filling out a form provided by the institution that manages the account, policy, or asset. Here's a brief overview of the steps to designate a beneficiary:

Obtain the beneficiary designation form from the institution managing your account or policy, such as your bank, life insurance company, or retirement plan administrator.

Complete the form by providing the required information about your chosen beneficiary, such as their full name, address, Social Security number, date of birth, and relationship to you.

In some cases, you may need to specify the percentage of the asset each beneficiary should receive if you are naming multiple beneficiaries.

Sign and date the form, and submit it to the institution. Make sure to keep a copy for your records.

Review and update your beneficiary designations periodically, especially after significant life events like marriage, divorce, or the birth of a child.

While the process of designating a beneficiary is relatively simple, it's essential to ensure that the information provided is accurate and up-to-date to prevent any issues or delays in distributing the assets to your chosen beneficiaries.

Who Can Change the Beneficiary on a Life Insurance Policy?

The owner of a life insurance policy has the authority to change the beneficiary designation. In most cases, the policy owner is the insured person, but sometimes the owner can be a different individual, a trust, or a legal entity.

To change the beneficiary on a life insurance policy, the policy owner should follow these steps:

It's essential to review and update beneficiary designations periodically and after significant life events to ensure the policy proceeds are distributed according to the policy owner's wishes.