A beneficiary is a person or entity that receives money from a benefactor. As a beneficiary you will be designated to receive money or assets when someone passes away. Beneficiaries will be eligible to receive distributions from a life insurance policy, a will, or a trust.
When do you need to designate beneficiaries, how do you choose them, and why is this needed? Let’s review how they work.
How Do Beneficiaries Work?
Beneficiaries will be named on documents that make them eligible for certain distributions of assets of money. These distributions often come with stipulations and various tax consequences that must be adhered to in order to stay eligible.
Why Do You Need a Beneficiary?
Beneficiaries are important because when people die they usually want to have a life insurance policy in place to distribute their assets. You can list multiple beneficiaries that you would like to give your assets to depending upon the person.
When Do You Name a Beneficiary?
You would name beneficiaries when you are setting up a life insurance policy. This will allow you to designate multiple trustees that would receive the death benefit when you pass away. You would also name a beneficiary when you are setting up a will or a trust, or naming someone on a retirement plan.
How Do I Choose a Beneficiary?
In order to choose beneficiaries you would first need to find a person that you would like to name as a primary or contingent beneficiary. Most people choose their spouse or children as their primary beneficiary. You need to think about how you would like to divide your assets. If you would like, you are able to leave your belongings to one person, multiple people, a trust, or even a charity.
You also want to remember to update your beneficiaries based on your family, your life situation and the relationships you have with your loved ones. For example if you have a disabled or sick family member you may consider leaving them funds for hospital bills in your will to ensure they are cared for once you pass away.
What Are Primary Beneficiaries?
A Primary beneficiary would be the one you choose to be first in line to receive a death benefit when you pass away. There can be more than one primary set up if you would like. Typically each primary beneficiary will receive a set percentage of the benefactors assets that would be specifically listed out on a life insurance form.
What Are Contingent Beneficiaries?
Contingent beneficiaries would be someone that is specified by a retirement or insurance account as the person to be second in line to receive your assets if something were to happen to your primary beneficiary before you pass away.
What Is an Example of a Beneficiary?
Let’s say “Bill”, for example, has come to the conclusion that he would like to list someone as his beneficiary before he passes a way. Before Bill dies he decides to include his son on his will and lists him as his primary beneficiary. Once Bill is gone, his assets will be distributed to his son in whatever proportion he chooses. The will would list out how Bill would like his assets to be distributed after his death.
The testator is the person that creates the will and can change a beneficiary name at any time. Bill Frank would also need to name an executor who would be in charge of distributing his assets if the testator passes away. This would ensure that his primary beneficiary (his son) would receive his assets after his death.
Revocable vs Irrevocable Beneficiaries
There are two types and it is important to understand the difference between them. The two types are revocable and irrevocable beneficiaries.
What Is a Revocable Beneficiary?
A revocable beneficiary would not have the guaranteed right to receive compensation from insurance policies. In this situation the main policy holder would have complete control over distributing assets and designating a beneficiary.
What Is an Irrevocable Beneficiary?
An irrevocable beneficiary is different because this person would have the obligated rights to the death benefit. This may consist of distributions from a life insurance policy, a will, or a trust. You would need to have your irrevocable beneficiary sign off on any changes that you plan to make. Changes could be updating or adding beneficiaries to your name.
They would also need to sign off on any compensation changes you plan on making to distribute your wealth to any beneficiaries when you pass away. This important to choose someone that you trust and will have your best interests in mind as your irrevocable beneficiary.
What Is a Life Insurance Beneficiary?
A life insurance beneficiary is the person that would receive a death benefit when you die. This person would receive a payout from your life insurance policy. They usually would be subject to rules on how much that they would be entitled to however.
Who Can Be On Your Life Insurance Policy?
You can list your spouse, children, friends, family, or really anyone you trust on your life insurance policy. When you purchase a life insurance policy you will be given an option to list beneficiaries that you would like to receive death benefits when you pass away. You should carefully think about who you would like your assets and belongings to be distributed to once you’re gone.
How To Change a Beneficiary On Your Life Insurance Policy
In order to change beneficiaries on your life insurance policy you have to list them on the life insurance beneficiary form. This document determines how your wealth will be distributed, and who will receive death benefits when you pass away.
You would need to name a primary and a contingent beneficiary. The primary beneficiary would be first in line to receive a death benefit when you pass away. The contingent beneficiary would receive your assets and money if something were to happen to your primary before you pass away.
Setting Up Your Beneficiaries
A beneficiary is a person that receives money or assets after someone passes away. A financial advisor can help you set up or change your set beneficiaries. Legal documents need to be carefully looked at and reviewed so that your family is cared for once you are gone.
It’s important to ensure that all of your assets are appropriately spread out when you pass away. Financial advisors can also help you manage your money and plan out your future. They will act in your best interest and assist you with distributing your assets. You should think about consulting with a financial advisor to help you set up a beneficiary!