A beneficiary is a person who receives assets at a contract owners death. The contract owner picks the beneficiary at opening the account, or later. There are two basic types of beneficiaries: primary beneficiaries and contingent beneficiaries.
Why Have a Beneficiary
Its important to select a beneficiary for a variety of assets. Most often, you find beneficiaries assigned for:
By assigning a beneficiary, a person makes it clear who should receive proceeds of any asset in the event of their death. This eliminates any questions or disputes among family members and friends who might contend that the deceased would have wanted another person to receive the assets.
Choosing a beneficiary also speeds things up for the chosen beneficiary because there is no need to wait for probate processes. Instead, a named beneficiary can typically claim assets as soon as the decedents death is documented. Moreover, a beneficiary designation usually supersedes (or overpowers) the instructions in a will so the will only applies to assets that do not have a named beneficiary.
Types of Beneficiaries
There are two basic types of beneficiaries:
- Primary beneficiaries
- Contingent beneficiaries
are the account owners first choice for a beneficiary. In the event of death, the first person who can claim the assets is the primary beneficiary. Note that you can have multiple primary beneficiaries in some cases. For example, you could have 3 primary beneficiaries, all of which receive 33.3% of assets.
Contingent beneficiaries are used as a backup. In the event that there are no living primary beneficiaries, the contingent beneficiary claims the asset. A common example is this:
A husband picks his wife as the primary beneficiary. She would receive any assets at his death. However, the husband and wife are killed together (at the same time) in an auto accident. Therefore, assets will go to a contingent beneficiary.
Keep in mind that most financial institutions will allow an account owner to change beneficiaries. To do so, you usually complete a simple form. I recommend reviewing your beneficiary selections periodically. Things change in life, and youll want to make sure you update beneficiary selections with marriages, divorces, births, and deaths.