What Is a Beneficiary and How To Choose One

The question of beneficiaries often comes up regarding life insurance, but that is not the only time they are relevant. We explain why beneficiaries are essential and how to choose one (or more) to ensure assets go where intended after your death.

No one wants to think about what happens when we die. From making funeral arrangements to providing for loved ones after we are gone, it involves tough decisions that require considerable planning. One of the most significant decisions a person can make in this regard is to choose a beneficiary who will receive things like a life insurance payout or retirement savings.

Most companies ask employees to pick a beneficiary during the benefits selection process. So, be prepared to answer this question before taking a new job or investing. But what goes into choosing a beneficiary? What if something happens to the first beneficiary? Is it an absolute requirement to choose one?

What Is a Beneficiary?

According to the estate planning website Trust & Will, a beneficiary is anyone a person names in an estate plan that will benefit from that estate. Naming a beneficiary provides guidance and direction for anything a person leaves behind when they die. Common items that require beneficiaries include:

• Life insurance policies
• Retirement plans, including 401(k) and IRA plans
• Social Security disability
• Savings and checking accounts
• Last will and testament
• Trusts

Who Can Be a Beneficiary?

A beneficiary does not have to be a single person, although that usually happens. Beneficiaries can also be organizations or entities. The holder of a life insurance policy or other benefits can name the following as beneficiaries:

• One person
• Two or more people
• Trustees of trusts
• Charities
• Their estate

If you decide not to name a beneficiary, the death benefit ends up in the hands of the estate.

What Is a Contingent Beneficiary?

According to the Insurance Information Institute industry experts, life insurance policies and other items should have both a primary and contingent beneficiary. This helps eliminate confusion and conflict over what a person leaves behind when they die.

The primary beneficiary is the person who will get the death benefit if the insurance company can find them or contact them. Contingent beneficiaries receive death benefits if the insurance company cannot locate the primary beneficiary.?

If the insurance company cannot find a beneficiary, they will pay the death benefit to the policyholder’s estate.

The Importance of Choosing a Beneficiary

Clarity of your wishes is the number one reason to choose beneficiaries, but it is far from the only one. Distributing assets after a person dies without clear direction can be expensive and time-consuming. Failure to select a beneficiary could lead to assets entering probate.

Probate is a legal process wherein courts — typically in the absence of a will or when heirs contest one — determine how and when to distribute assets among would-be heirs. Each state has different probate standards. This leads to delays and confusion regarding asset distribution and the accumulation of court fees, taxes and payments that can reduce the amount of money loved ones receive.?

Things To Consider When Choosing a Beneficiary

The choice of a beneficiary is a personal one. The reasons for picking a beneficiary may differ depending on the purpose of the life insurance policy or type of account.

In many cases, the selection process is simple: The beneficiary is a loved one the insured person wants to protect and provide for. In others, the choice is a financial transaction with no emotional stakes. The following factors are important considerations for picking a beneficiary:

• Insurable interest: The person or entity named as the beneficiary must have what is known as insurable interest for life insurance. An insured person can name any beneficiary, but that person or entity must have a financial interest. It is common for life insurance policies to name spouses and children as beneficiaries. Why? The life insurance policy exists to support them after the insured’s death.
• Age: Most insurance companies and retirement accounts will not pay benefits to anyone under 18. In this situation, it makes more sense to establish a trust for that minor and name a trustee to manage things until the child reaches the appropriate age.
• Ability to manage money: If the preferred beneficiary cannot manage money, establish a trust and name a trustee to invest and discharge funds on their behalf.
• Contingency: Always name a secondary beneficiary so that if the insurance company cannot locate the primary one, the account can proceed to the secondary beneficiary without the hassle of probate.
• State or policy rules: Some states or insurance companies restrict whom a person can name as their beneficiary. Attorneys can provide legal guidance for any state-specific issues or regulations.

How To Choose a Beneficiary

Complicated family dynamics and financial situations can impact whom a person chooses as a beneficiary. The best way to think about selecting beneficiaries is to answer the following questions:

• Who depends on me financially?
• Am I married?
• Do I have children?
• Will I have more children in the future?

However you select beneficiaries, being as specific as possible is key to reducing stress and unforeseen consequences. Identify the would-be beneficiary by name and with Social Security numbers. This helps the life insurance company, bank or financial firm find them. It can also reduce the risk of disputes regarding death benefits or payouts from any additional accounts.

For example, writing “spouse of the insured” without naming a specific person could lead to an ex-spouse staking a claim on the benefits. On the other hand, naming specific children makes it so that any kids born after the naming of beneficiaries will not receive any portion of the death benefit.

Keep Beneficiary Designations Current

This process becomes even more complicated when the life insurance company cannot locate one or more beneficiaries. In this case, further instructions can save a lot of headaches.?

Say a person names two children as beneficiaries with the stipulation that each one receives half. How is the death benefit distributed if one of those children dies before the insured? Does the total amount pass on to the secondary beneficiary? Is the initial amount divided among the heirs of the deceased beneficiary?

This question proves that choosing a beneficiary is not what legendary infomercial icon Ron Popeil would describe as “set it and forget it.” Review beneficiary designations every few years, including after significant life events including:

• Marriage
• Birth of a child
• Adoption
• Divorce
• Remarriage
• Death in the family

Ensuring that beneficiary designations are current eliminates the risk of leaving proceeds of life insurance or other accounts to ex-spouses or people who are no longer among the living.

Final Thoughts on Beneficiaries

Naming beneficiaries is one of the most important parts of estate planning, purchasing life insurance, and opening bank accounts like retirement funds and savings accounts. Consider beneficiaries you choose carefully, and do not leave anything to chance when it comes to your assets.

Top Takeaways

What Is a Beneficiary and How Do I Choose One?

• Beneficiaries are people or entities who receive the proceeds from life insurance, bank accounts, pensions and retirement funds when you die.
• Naming primary and secondary beneficiaries is an excellent way to ensure assets end up with the desired parties.
• Not naming beneficiaries risks assets being eaten up by costly delays and legal fees.

(Reporting by NPD)