A named beneficiary is an individual, established by a written legal document, who is entitled to collect assets from a trust, insurance policy, pension plan account, IRA, or any other financial instrument. When an asset has multiple named beneficiaries, they share in the proceeds at the time of disposition. In some instances, such as with an annuity policy, the policyholder and the named beneficiary may be the same individual.
Beneficiary designations can be detailed. For instance, by naming a specific beneficiary in a life insurance policy, the proceeds will not be subjected to the terms of a will, nor will they be affected by probate proceedings.
Key Takeaways
- A named beneficiary is an individual, stipulated by a legal document, entitled to collect assets from a trust, insurance policy, pension plan, or IRA.
- Individuals may be designated as primary beneficiaries, who are first in line to receive benefits.
- Contingent beneficiaries receive benefits if the primary beneficiary refuses the asset, is deceased, or cannot be located.
- A beneficiary can also be an estate, instead of a single person.
Types of Named Beneficiaries
There are several types of beneficiaries:
- Primary Beneficiary: The individual who is first in line to receive benefits from an asset.
- Contingent Beneficiary: This individual receives benefits if the primary beneficiary is deceased, cannot be found, or refuses the assets. Conditions must be met before a contingent beneficiary receives any insurance proceeds or retirement assets.
- Secondary Beneficiary: Another term for a contingent beneficiary.
It’s also important to know that a named beneficiary does not necessarily have to be an individual. For example, an insurance policy’s beneficiary could be the estate of the deceased, in which case, the actual beneficiaries will be designated in the will.
A beneficiary is different from an heir. The former is entitled to collect property via decree of a will, while the latter is someone who receives assets through intestate succession.
Risks Related to Named Beneficiaries
Grantors must formally name their beneficiary or beneficiaries within a comprehensive estate planning process. Financial advisors commonly recommend reviewing and updating beneficiary designations periodically, especially after major life events like a divorce or the death of a significant other.
Understanding Primary vs. Secondary Beneficiary
The primary beneficiary is first in line to receive assets as stated in a will. If the primary beneficiary either cannot or does not want to accept the assets, the secondary beneficiary, also known as the contingent beneficiary, receives the assets next.
Who Can Be a Named Beneficiary?
A named beneficiary is usually an individual or a group of individuals such as friends or family members. However, the named beneficiary can also be an estate or a nonprofit organization, chosen in accordance with the account holder’s insurance policy.
Advantages of Having a Named Beneficiary
Designating a named beneficiary ensures that a deceased person’s assets are allocated according to their wishes. It also provides tax advantages for the beneficiary and allows the beneficiary to bypass probate.
The Bottom Line
A named beneficiary is the person entitled to receive assets from a will, trust, or other financial instruments. When you open a life insurance policy or retirement account, you will list the named beneficiaries who will have access after you pass away.
Related Terms: Primary Beneficiary, Contingent Beneficiary, Estate Planning, Probate.
