person signing over their beneficiary

What is a Beneficiary?

You may know that it’s important to assign a beneficiary for life insurance policies or trusts, but what’s the purpose behind this practice? This overview can help you understand the two types of beneficiaries and why it’s important to name individuals to receive your death benefits. 

What do beneficiaries do?

Naming a beneficiary can be an easy and uncomplicated process. In many cases, it’s as straightforward as choosing a spouse or a child. Beneficiaries don’t really do anything. These are simply individuals who receive your benefits after you’ve passed away (including anything in your trust or payouts from your life insurance policy). 

Naming a beneficiary is incredibly important because you’ll want to make sure your assets go to the right people after you die. For example, let’s say you have $100,000 in your 401k and a $1 million life insurance policy. Without naming a beneficiary, your family or friends will have to go directly through the courts where your assets will be divided through the probate process. 

The probate process differs from state to state, but there's a good chance that a stranger will determine who gets your assets. In some cases, it’ll be divided equally among all living relatives, and this can often include ex-spouses.

Who should you choose as your beneficiary designation? 

It’s important to consider who will be your beneficiary across your entire portfolio. This can include your IRA or retirement plan, any money from savings accounts, and your life insurance policies. Remember that your beneficiary often trumps your will, so you should never skip this step. 

As mentioned before, your spouse is often your primary beneficiary, and, in some cases, you’re required to name your spouse. For example, your employer-sponsored retirement plan requires you to get written permission to name someone other than your spouse as your primary beneficiary. 

In other cases, you may have the choice to choose someone other than your spouse or one of your children. Young people may often name a parent or sibling as their beneficiary, but naming parents can create tax issues from the net worth of the inheritance. 

What are the types of beneficiaries? 

As mentioned before, there are two different types of beneficiaries that you should consider. The first is a primary beneficiary. This is a person (or persons) that will receive the proceeds of your life insurance policy after you pass. So if you have a $100,000 life insurance policy, this will go to the individual(s) you named as your primary beneficiary. 

A contingent beneficiary is another type of life insurance beneficiary that you should name. In some cases, the contingent beneficiary may be referred to as a “secondary beneficiary.” This individual won’t receive any of the life insurance proceeds as long as the primary beneficiary is alive. However, if the main beneficiary passes on, your inheritance will be given to the contingent beneficiary. For example, many people may name their spouse as their primary beneficiary and then name their children as contingent beneficiaries. 

Naming both a primary and contingent beneficiary is essential because life is so unexpectable. Naming both types is a great way to be sure your money is put to use by people you love no matter what happens. 

Last Updated: December 12, 2018