A beneficiary is a person or an entity who inherits another's asset after death. Life insurance policies and retirement accounts are two assets that frequently have named beneficiaries that account owners designate in advance. After death, the asset passes to the beneficiary without the hassles of going through probate court. Account owners have the option to choose both primary and contingent beneficiaries, and this determines the beneficiaries' order of inheritance.
Types of Beneficiaries
Although named beneficiaries are typically people such as spouses and children, you can also name a trust as a beneficiary of a life insurance policy or retirement account. To pass along the trust's assets to your intended heirs, name the family or friends you intend to remember as the trust's beneficiary or beneficiaries. This is helpful if you want to protect the assets from being squandered. It's almost always advisable to name a beneficiary whenever possible, because it enables the assets to pass quickly to your chosen heirs without the expense and hassle of probate court.
The Primary Beneficiary
When you purchase a life insurance account or open an investment account, you'll have the option to name primary and contingent beneficiaries. The primary beneficiary is your first choice heir; provided that this person is alive, he will inherit the asset. You can change the primary beneficiary at any time; for example, this may occur when a married couple divorces. The owner may wish to pass account proceeds directly to his children instead of his former spouse. Primary beneficiaries don't always have the same account ownership rights as the original owner, however. Employer-sponsored retirement accounts or IRAs may not allow a beneficiary to make new contributions. Usually, they may only take distributions.
The Contingent Beneficiary
Contingent beneficiaries are the backup primary beneficiaries. If the primary beneficiary is still alive, then the contingent beneficiary or beneficiaries inherit nothing. If the beneficiary has passed on, then the contingent beneficiary takes over the primary beneficiary's role and inherits the asset. Children, siblings and parents are common contingent beneficiaries. Like the primary beneficiary, the contingent beneficiary may only be allowed to take distributions instead of make contributions. Contingent beneficiaries also can be changed at any time.
When a Beneficiary Isn't Named
When a beneficiary isn't named by the account owner and the account owner dies, then the asset is transferred to the deceased's estate. The assets that belonged to the deceased -- called the decedent -- are placed into the estate and will be distributed by the decedent's executor or by a court of law. The decedent's will may name instructions for how to proceed; if the decedent died without a will, then state law determines how the assets are distributed. Avoiding this process is paramount to avoid excess cost, time and possibly, frustration. Taking the time now to name as many beneficiaries as possible helps avoid costly legal fees later.
- Americo: Policyholder FAQs
- Financial Dictionary: Contingent Beneficiary
- Insurance Information Institute. "What Is a Beneficiary?" Accessed Aug. 5, 2020.
- HG.org Legal Resources. "Importance of Naming Contingent Beneficiaries in Estate Planning Documents." Accessed Aug. 6, 2020.
- State Farm. "What to Consider When Choosing a Beneficiary." Accessed Aug. 5, 2020.
- American Academy of Estate Planning Attorneys. "Modifying an Irrevocable Trust." Accessed Aug. 5, 2020.
Lisa Bigelow is an independent writer with prior professional experience in the finance and fitness industries. She also writes a well-regarded political commentary column published in Fairfield, New Haven and Westchester counties in the New York City metro area.