A beneficiary is the person(s) or entity that you designate to receive assets after your death. If you don't name a beneficiary, your assets will go to the person designated next in line by your state or by the institution that holds those assets.
Learn more about how to choose a beneficiary and why it is important to select someone yourself.
What Is a Beneficiary?
A beneficiary is someone who receives assets at your death, such as a death benefit from a life insurance policy. You'll probably be asked to select a beneficiary if you have one of these kinds of accounts:
- Annuity contracts
- Individual retirement accounts (IRAs), 401(k)s, and other retirement accounts
- Life insurance policies
- Pension benefits
Your beneficiary instructions can be separate from any last wishes you express verbally or in your will.
How a Beneficiary Works
When you open a financial account that will exist after your death, you will usually be asked to designate a beneficiary. This designation is included as part of the paperwork for that account.
A beneficiary designation usually supersedes (or overpowers) the instructions in a will, so the will only applies to assets that do not have a named beneficiary.
Beneficiary designations should be reviewed regularly, especially after major life events such as:
- Birth of a child
- Death of a spouse, partner, or a beneficiary you have already designated
Any major event in your life or that of your beneficiary can create changes that impact you or your beneficiary. You may need to alter your designations to reflect these changes an ensure that the correct person receives your assets after your death.
There are some cases in which a new beneficiary cannot be named. These include irrevocable trusts or divorce agreements made with certain terms.
Generally, minors are not allowed to enter contracts and can't legally own property. This prevents them from owning certain types of accounts, such as a retirement account, or receiving your life insurance payout themselves.
However, there are ways to ensure that money goes to a minor or is spent for their benefit. One way to designate a minor as a beneficiary is to create a living trust and assign a custodian, who will act in the best interest of the child. You can also designate the child's guardian as the beneficiary instead.
Social Security Beneficiaries
You will also need to designate a beneficiary if you receive Social Security benefits.
|Types of Social Security Beneficiaries|
|Type of Benefit||Allowed Beneficiaries|
|Retired worker and auxiliary beneficiaries||Spouse* of a retired worker|
|Child of a retired worker|
|Survivor benefits||Child of a deceased worker|
|Widow(er) age 60 or older|
|Widow(er) under age 60 with a minor or disabled child living at home|
|Disabled widow(er) age 50 or older|
|Dependent parent of a deceased worker|
|Disabled worker and auxiliary beneficiaries||Spouse* of a disabled worker|
|Child of a disabled worker|
To qualify as a beneficiary in these cases, a child must meet one of three conditions:
- Minor child under age 18
- Adult child disabled before age 22
- High school student under age 19
Do I Need a Beneficiary?
There are several reasons for choosing a beneficiary to receive your assets after you die.
By assigning a beneficiary, you make it clear who should receive your assets in the event of your death. This eliminates any questions or disputes among remaining family members and friends who might argue that you would have wanted somebody else to receive the assets.
Never assume that you know how your assets will be distributed. Different financial institutions use different approaches, and they might default to a certain option even if you don’t request that option on a beneficiary designation form.
Choosing a beneficiary speeds up the process of distributing assets after your death. It can be faster and easier to claim assets as a beneficiary, rather than waiting for the probate process to be completed.
A named beneficiary can typically claim assets as soon as the death is documented, usually by providing documents such as a death certificate and affidavit of domicile.
Types of Beneficiaries
There are two basic types of beneficiaries: primary and contingent.
Primary beneficiaries are the account owner’s first choice for a beneficiary. In the event of death, the benefits go to the primary beneficiary, if still living.
You can have multiple primary beneficiaries in some cases. For example, you could have three primary beneficiaries, each of whom would receive 33.3% of assets.
Contingent beneficiaries are used as a backup, in the event that there are no living primary beneficiaries or they cannot be found.
For example, assume an account owner picks his wife as the primary beneficiary. She would receive all assets at his death. However, if the husband and wife both die at the same time in an auto accident, there is no living primary beneficiary. As a result, assets will go to a contingent beneficiary, if any.
If there is no contingent beneficiary, or when none of the contingent beneficiaries claim the assets, then either state law or the policies of the organization holding the account will dictate what happens to the assets.
There are also other ways of naming beneficiaries within these two main groupings. You could:
- Name an organization or entity as your beneficiary, rather than a single person.
- Designate that assets be distributed "per stirpes," indicating that if the beneficiary dies before you, their children become the beneficiaries.
- Decide the assets should be distributed "per capita," or divided equally among the beneficiaries upon your death.
Especially when considering children, multiple generations, or the possibility that beneficiaries may predecease you, it’s essential to understand how beneficiary designations work and what your options are.
Speak with your financial planner or estate planning attorney to make sure you're recording your wishes properly.