What’s a Beneficiary?

Beneficiaries, What Are They & Who Should Be Yours?
Contributors: Nicola Date, Katherine Read. Edited by Rachel Wait & Reviewed by Francis Hui
Need to Designate a Beneficiary? What Is a Beneficiary? How Do You Choose Who You Want as Your Beneficiary? Read on to Find Out EVERYTHING You Need to Know About Beneficiaries. Make Sure That You Make an Informed Choice.

Wondering what is a beneficiary?

Designating your beneficiaries — the people or corporations who will receive the benefits from your policy or accounts after you die — is a key component of owning life insurance and other financial products.

Because you can’t alter a beneficiary designation after you’re gone, it’s important to think about who’ll receive your assets or the payout (called a “death benefit”) from your life insurance policy.

Here’s some basic information on beneficiaries that can be useful.

As experts in our field, we discuss the following in this article:

    Our team at EveryInvestor has delved into hours of research and consulted industry experts to bring you everything you need to know about beneficiaries in 2022.

    Here’s what we found.

    What’s a Beneficiary?  

    A beneficiary is a person or entity named as the recipient of a life insurance policy’s death benefit. 

    You can have one or more beneficiaries, and you should identify them in your will. You can also add beneficiaries to pensions, investments, savings, and life insurance plans.

    You may select recipients based on their needs, or you may own items that are best suited to specific friends or family members.

    What’s the Role of a Beneficiary?

    Beneficiaries are the person or persons you designate to inherit your money, property, and things. 

    When you make a will or other legal contracts that require you to name someone to benefit in your place, you’ll also name beneficiaries.

    Almost every financial institution will ask you to name a beneficiary when you open a new account — a bank account, life insurance, a brokerage account, and retirement accounts like a 401k and IRA, among others. 

    Types of Beneficiaries 

    There are 2 types of beneficiaries: primary and secondary.

    Here’s more information.

    Primary Beneficiaries Versus Contingent Beneficiaries

    Primary beneficiaries are the person or persons who will get your life insurance policy’s death benefit first, usually your spouse, children, or other family members.

    Most policies allow you to name at least one backup beneficiary, also known as a contingent beneficiary. 

    If all the primary beneficiaries have died, they distribute the death benefit to the secondary beneficiaries.

    What’s a Secondary Beneficiary?

    A secondary or contingent beneficiary is the backup or supplementary beneficiary. 

    If the primary beneficiary is deceased, unavailable, or refuses to receive the proceeds, the secondary beneficiary receives the funds.

    People frequently name charities as contingent beneficiaries. If your intended beneficiary dies before you, the money will go to your favoured charity.

    Including contingent beneficiaries in your will is a smart idea because it can help prevent family turmoil after your death.

    Why It’s Important to Choose a Beneficiary

    It’s important to choose a beneficiary because your will doesn’t govern many financial instruments, including life insurance benefits. 

    Making sure you’ve named a beneficiary for all of your policies and accounts ensures they distribute the benefits as you wish.

    Although naming a beneficiary isn’t required, it’s typically the reason people purchase life insurance‌ – to benefit someone they care about. 

    When you die, your other assets may also be of use to the people you care about.

    If you don’t designate a beneficiary, it may be unclear who gets the funds, which can delay the benefit payment.

    What Happens if You Don’t Appoint Beneficiaries?

    For retirement accounts like a 401k, if you die without naming a beneficiary, they will hold your assets in probate — a legal process where a court has to sort out your financial situation and determine how to distribute your assets.

    Most life insurance policies have a default order of payment if you do not name a beneficiary.

    For many individual policies they pay the death benefit to the owner of the policy if they differ from the insured person and are still alive, otherwise they pay it to the owner’s estate. 

    For group insurance policies, the order typically starts with your spouse, then your children, then your parents, and then your estate.

    If there is no default order specified in your policy, the payout goes to your estate, or is held in probate.

    In either case, the probate process can be lengthy and complicated, and it may take years before your loved ones can access your assets. You can avoid this by designating beneficiaries.

    How to Choose a Beneficiary

    When choosing a beneficiary, consider who requires the money and whether a particular account type will benefit one beneficiary more than another.

    It’s critical to evaluate your beneficiaries’ designations frequently once you’ve chosen them. Major life events (death, divorce, or birth) may cause you to change your mind about who you want as your beneficiary. 

    The last thing you want is for your money to end up in the hands of someone you don’t care about.

    Important to remember.

    You’ll also want to make sure that your will doesn’t contradict your beneficiary designations. In most cases, beneficiary designations take precedent over your will.

    In principle, you have complete control over your beneficiaries, though the law restricts your ability to nominate someone other than your spouse as a beneficiary on some retirement accounts.

    Most financial services businesses will give you a form or a webpage to designate your beneficiary.

    Your company may keep your beneficiaries on file for all of your employee benefits — life insurance, retirement plans, profit-sharing plans, and other benefits — if you have life insurance or retirement accounts with them.

    Check with your financial professional to be sure you have beneficiaries on file if you have investments, retirement accounts, or life insurance with them.

    What Happens if a Minor Is a Beneficiary? 

    There are specific concerns when naming beneficiaries if you have minor children. Minor children are not eligible to collect life insurance payouts or inheritances in the same way that adults are. 

    If a life insurance policy has minor children as beneficiaries, the proceeds go to their legal guardians. 

    You could choose to build a trust and name it as a beneficiary on your life insurance policy or in your will. 

    The insurer pays the proceeds into a trust for the minor beneficiary. Your trustee would be in charge of your minor child’s trust funds. 

    If you choose this option, make sure you select a trustee who you believe can handle this responsibility.

    It’s beneficial to work with a lawyer to structure any legal documents so that they meet your goals without causing further issues, especially with estate planning.

    What Can You Expect If You’re a Will Beneficiary?

    If you’re a will beneficiary, the executor or solicitor will normally contact you to advise you, you are a beneficiary. 

    The executor is a person who’s designated to administer a deceased person’s last will and testament, and their major responsibility is to carry out the instructions to handle the deceased’s affairs and intentions.

    The will becomes a public document once the executor has applied for Probate (the legal and financial processes involved in dealing with the assets of a person who has died), and you can request a copy to see if you are a beneficiary of the estate.

    What Happens if a Beneficiary of a Will Is Deceased?

    If a beneficiary of a will is deceased, their benefit will normally lapse and go back into the estate.

    There are 2 exceptions to this:

    • If the predeceased beneficiary was a direct descendant of the testator of the will of which they were a beneficiary instead of expiring, they will pass any benefit on to the beneficiary’s surviving children.
    • If the testator provided for this possibility in their will and left instruction.

    How Do You Change Beneficiaries?

    Changing beneficiaries is usually simple, but dependent on the type of life insurance you have.

    Some insurance contracts specify whether you can name a revocable or irrevocable beneficiary. If it’s revocable, you can alter the beneficiary by filling out a form.

    Policies with irrevocable beneficiaries are a little more difficult. 

    You can’t alter beneficiaries without their approval if you have an irrevocable beneficiary. The change would require the consent of your present beneficiary and any contingent beneficiaries. 

    Irrevocable beneficiaries have to give consent to be removed, so they’re guaranteed to get the funds from the life insurance policy unless they consent.

    For this reason, parents frequently name their children as irrevocable beneficiaries.

    Common Questions

    What Happens if You Don't Name a Beneficiary?

    Can an Executor of a Will Be a Beneficiary?

    Can a Trustee Be a Beneficiary?

    How Can I Find Out if I'm a Beneficiary of a Trust?

    What’s a Beneficiary in Banking?

    What Does It Mean if You’re a Beneficiary?

    Should You Make Your Child a Beneficiary?

    In Conclusion

    A beneficiary is a person or entity named as the recipient of funds from policies to be paid out  on the death of the insured. 

    You can have one or more beneficiaries. 

    You can add beneficiaries to pensions, investments, savings, and life insurance plans.

    There are 2 types of beneficiaries, primary beneficiaries and secondary beneficiaries.

    Primary beneficiaries are the persons who will get your death benefit first, usually your spouse, children, or other family members.

    If all the primary beneficiaries have died, the insurer distributes the death benefit to the secondary beneficiaries.

    When you choose beneficiaries, consider who needs the money and whether a particular account type will benefit one beneficiary more than another.

    It’s critical to evaluate your beneficiaries’ designations frequently once you’ve chosen them.

    Major life events (death, divorce, or birth) may cause you to change your mind about who you want as your beneficiary. 

    And the last thing you want is for your money to end up in the hands of the wrong person.

    If there’s no beneficiary, the funds will go into probate and a court will decide where to allocate the death benefit. 

    The probate procedure can be lengthy and complicated, and it could take years for your loved ones to have access to your assets. 

    You can avoid this if you name beneficiaries of all your policies, life insurances and investments.

    We believe that by this point, the question what is a beneficiary? has been addressed.

    Editorial Note: This content has been independently collected by the EveryInvestor team and is offered on a non-advised basis. EveryInvestor may earn a commission on sales made from partner links on this page, but that doesn’t affect our editors’ opinions or evaluations. Learn more about our editorial guidelines.