What Is a Beneficiary?

Quick Answer

Beneficiaries are people or legal entities that receive your assets or insurance payouts after you die. Learn how beneficiaries work, why they’re important and how to designate a beneficiary.

Two people reviewing a will to name a beneficiary.

You work hard to get ahead in life and achieve financial success—but have you ever stopped to think about what happens to your assets after you're gone? Choosing a beneficiary can ensure your hard-earned money goes to the right place. A beneficiary is a person or entity you designate to receive proceeds from an insurance policy or inherit money or other assets after your death. Beneficiaries are often people, but you can also name a legal entity, such as a trust or a corporation, as your beneficiary.

How Do Beneficiaries Work?

Essentially, beneficiaries are people who receive a benefit from you after you die. Beneficiaries can be listed in your will, as well as on your financial accounts and life insurance policies. After you die, your beneficiaries may receive:

  • The payout from your life insurance policy
  • The assets in your retirement account
  • The assets in your brokerage account
  • Other assets named in your will

Beneficiaries can be people or legal entities. For example, you might set up a living trust as part of your estate plan, and name the trust as the beneficiary of your life insurance policy. You could also choose a legal entity, such as a business you own, a favorite charity or your alma mater, as a beneficiary.

Choosing a beneficiary is an important part of estate planning because it ensures that your assets are distributed the way you want. Unless you name a beneficiary for a certain asset, the court will decide who gets that asset during a process known as probate.

In most cases, probate courts ultimately give your assets to your spouse and children, if you have them. However, probate can take eight to 12 months or more—a long time for your loved ones to wait for the money they may need to pay the bills.

Types of Beneficiaries

  1. Primary beneficiary: The primary beneficiary is the first in line to receive the assets or benefits after your death.
  2. Contingent beneficiary: A contingent (or secondary) beneficiary is an alternate who receives the assets if the primary beneficiary has passed away or is otherwise unable to take ownership.
  3. Multiple beneficiaries: You can choose to split assets or benefits among two or more beneficiaries. If so, you'll need to specify the percentage or items that each individual will receive.

When choosing a beneficiary, consider what you want to achieve with your insurance proceeds or assets. For example, if you have a life insurance policy designed to help your family business keep operating, the business entity should be the beneficiary. On the other hand, if you bought life insurance to help your family get by without your income, your spouse should be the beneficiary.

In fact, community property states make your spouse the primary beneficiary on your life insurance by default. If you want someone else to be your beneficiary, you must get your spouse's signed consent. Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin are community property states.

In many jurisdictions, minors cannot be named as beneficiaries. If you want a child or grandchild to receive benefits, you can create a living trust and name a trustee who will manage the assets on the child's behalf.

How to Designate a Beneficiary

The process of naming a beneficiary depends on the specific financial account or insurance policy. Here are some general steps to follow:

1. Gather Information

Collect the necessary details about each financial account or life insurance policy. You'll need the account or policy number and the website or contact information of the financial institution or insurance company.

2. Review Beneficiary Options

Visit your insurance carrier's or financial institution's website or call them to view or get a copy of the beneficiary designation forms. Make sure you understand the options available for naming beneficiaries, such as primary, contingent or multiple beneficiaries.

3. Consider Your Intentions

Determine whom you want to designate as primary and contingent beneficiaries. If you're naming more than one beneficiary for an account or policy, figure out the percentage each beneficiary should get.

4. Complete the Necessary Paperwork

Follow the directions for filling out the beneficiary designation form provided by your financial institution or insurance company. You may have the option to do this online or by filling out a paper form. You'll generally be asked to include the beneficiary's full legal name. Some forms also ask for their Social Security number, relationship to you, contact information or date of birth.

When choosing multiple beneficiaries, list them each by name, not as a group. Vague designations such as "my children" can lead to legal disagreements—for example, does that term include stepchildren, adopted children or children you had outside of marriage?

Don't rely on your will to direct the distribution of all your assets. The account's beneficiary forms take precedence over your will for the following:

  • Life insurance policies
  • Retirement plans
  • Individual retirement accounts (IRAs)
  • Annuities

If your will names one family member as the beneficiary of your life insurance, for instance, but the policy's beneficiary form lists another, the payout will go to the person on the form.

5. Keep Beneficiary Designations up to Date

Choosing a beneficiary isn't a "set it and forget it" task. To ensure your beneficiary designations reflect your current wishes, regularly review and update them to suit any life changes, such as marriage, divorce, having children or changes to other key relationships.

The Bottom Line

Like writing a will or making an estate plan, choosing beneficiaries for your financial accounts, life insurance policies and other assets helps to ensure that your wishes are honored and your loved ones are financially secure after you die. Reviewing your beneficiary designations can be part of an annual financial checkup that includes regularly checking your credit report. Your family can't inherit your credit score, but keeping your credit in good shape can give you access to loans, credit cards and other tools that can help you build the life you want for them.