While applying for a life insurance policy or a bank account, you may have come across the term “beneficiary.” You probably know that in that context, beneficiaries are the people you nominate. They are usually those you can trust to take over your finances in case the need ever arises.
The beneficiaries you name get to determine the future of your money, so it is important to learn all about it and do it with care. When we spend so much time trying to make money, why not ensure it is in worthy hands after us, too?
What is a beneficiary?
A beneficiary is a person who will receive certain rights, inheritance, or benefits associated with the benefactor’s asset. If you own the property or asset, you are a benefactor. And the person you want to pass it on to is the beneficiary. The property or asset owners are the ones who designate the beneficiaries.
The asset can be land or other kinds of investments. Financial products that pay out benefits in the long term usually have designated beneficiaries. Examples of such products include retirement accounts, brokerage accounts, and even bank accounts. In insurance, the person receiving the claim is called a beneficiary.
Spouses, friends, or family members are usually beneficiaries.
Why beneficiaries are important
Here are some arguments to convince you to take action promptly when it comes to naming your beneficiaries.
1. You know best.
It is important to name one’s beneficiaries because they are like the caretakers of your wealth. And you are best placed to know who might take care of your belongings in accordance with your wishes when you are not able to do it.
2. The lack of a will can be inconvenient for your loved ones.
The law secures the rights of beneficiaries but you don’t want your loved ones to have to seek legal help. If you die without a will, your natural successors may have to go to court, and it sure is a hassle. If you name your beneficiary, your loved ones could be spared a trip to court.
3. A beneficiary can help ensure your money is put to good use.
When you pick the right beneficiary, it prevents outsiders or the state from gaining the right to make decisions about the future of your money. Naming beneficiaries is a way of retaining the right to control your assets. You get to decide who will control your financial assets and manage them. You should choose your beneficiaries because you deserve to have a say over your hard-earned money. Besides, the exercise could be your last chance to make an impact on the world after you’re gone.
4. Naming a beneficiary is how you protect yourself and your loved ones.
Naming a beneficiary is thus usually beneficial to you or your loved ones. With a life insurance policy, the loved one/s that you name will benefit, but with retirement accounts—usually, the person paying the premiums stands to profit. In fact, the point of creating a life insurance policy or retirement account is to protect the beneficiary.
Beneficiaries for most financial accounts remain private. Unless the account holder tells them, they are only informed about their share in the assets after they become owners.
Types of beneficiaries
There are two types of beneficiaries for financial accounts.
1. Primary beneficiary: The main beneficiary of your financial assets is called the primary beneficiary. If you want to leave your property to someone, they will be your primary beneficiary. Primary because they are your first choice. Other beneficiaries can also be listed in a will, but the primary receives all assets without exception.
2. Contingent beneficiary: These beneficiaries are technically entitled to receive assets, but only under certain conditions. Also known as secondary beneficiaries, they only receive assets if the primary beneficiary is
- Dead, or
- Cannot be located.
As the owner, you can list multiple contingent beneficiaries and lay down rules to govern asset distribution between them.
How a beneficiary works
While designating a beneficiary, you, as the owner of an asset can put into place certain restrictions and conditions on the transfer of assets. This ensures that only the beneficiary only takes over when they fulfill all your conditions.
The restrictions may or may not be age-related. If the condition is age-related, the assets are transferred only when the beneficiary attains a certain minimum age. Such restrictions help protect child beneficiaries.
Beneficiaries who receive assets do not have to pay taxes on them. In most cases, there is no tax on the principal itself, but the interest accumulated as a result of the principal might be. We encourage you to check your local state or national laws to confirm.
While the benefactor is living, they can make any number of changes to the beneficiary list. They can also add instructions on the execution of the will. This is a useful option to consider if there is any chance that complications like divorce, death, or incompetence may arise.
What happens if there’s no designated beneficiary?
If you do not name your beneficiary, the state takes possession of your belongings after you. Once this happens, it will gain the power to make decisions about the future of your money, in accordance with local laws. And the state will distribute your assets as it sees fair. So, if you own any assets and haven’t yet legally nominated someone, it makes sense to do it yourself. The sooner the better.