Most of us know what a beneficiary is — or at least have an idea about what it is. It basically pertains to a person who receives assets should you pass on.
While it seems simple and easy, there are a lot of other important things that you need to know about choosing a beneficiary. Thus, we are going to share with you all the essential details pertaining to that.
Just a quick fact from the United States Social Security Administration, the total number of beneficiaries receiving benefits as of December 2019 is 64,064,496. These beneficiaries are comprised of retained workers and dependents, survivors, as well as disabled workers and dependents.
Do you see that? There are quite a lot of them to date.
Take note that the number does not even include uninsured beneficiaries yet, wherein according to SSA, “benefits to such beneficiaries are initially paid from the Old-Age and Survivors Insurance Trust Fund and are subsequently reimbursed from the general fund of the Treasury.”
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Now, going back to selecting beneficiaries, it is important to note that there are certain things that you need to take into consideration. While you can choose anyone to be your beneficiary, we highly recommend you really take time to think things through especially if you are single (because married people or those with kids, it’s easier to decide who their beneficiaries will be).
So, without further talks, here are some of the key points that we are going to tackle today:
- What is a beneficiary?
- Why choose a beneficiary?
- When you would name a beneficiary?
- How to choose a beneficiary?
- What are the different types of beneficiaries?
- How to make minors as beneficiaries?
- Important Reminders
WHAT IS A BENEFICIARY?
First and foremost, before we talk about choosing or selecting a beneficiary and all that, it is important that we fully understand what a beneficiary is all about.
According to The Economic Times, in general, a beneficiary is someone who “receives benefit from a particular entity (say trust) or a person.”
Furthermore, The Economic Times explains, “The eligibility to be considered for the benefits is confirmed either as per the specifications in the policy documents or by other legal norms such as that for a legal heir.”
Normally, the insured person is asked to name a beneficiary during the time of commencement of a particular insurance policy. More so, provisions also exist for making a contingent beneficiary should the primary beneficiary is nor more or does not qualify for certain age criteria during that time.
We often encounter the word beneficiary when we buy insurance policies — in which, a beneficiary is defined as the person or an entity who/that is entitled to receive the claim amount as well as other benefits upon the death or passing of the benefactor or on the maturity of the policy.
Naming a beneficiary is important. Failure to name a beneficiary or beneficiaries could have a disastrous effect on a family’s financial health in case you or your spouse (in the case of married people) die without making the appropriate plans.
If you want to know more what a beneficiary is all about, check this informative video by The Audiopedia:
WHY CHOOSE A BENEFICIARY?
We all work hard to earn money, right? Basically, we ensure we are financially good because we want to take care of our family. We want to ensure that even when the time comes when we die, we know they are financially secure.
These things are actually the very reasons why you need to name a beneficiary. But more to that, here are some key points why you need to appoint or choose a beneficiary or beneficiaries (depending on what is required):
CLARITY
Sad to say, grief does make some people go a little crazy. Family members would start fighting over who gets what, and before you even know it, family members are fighting really hard.
By naming a beneficiary or beneficiaries, it makes your wishes crystal clear, and that no one in the family can question that. Naming a beneficiary is legal, and it does bear weight.
Furthermore, choosing someone as your beneficiary also helps keep peace among family members. No room for questions or disputes, or even arguments about certain assets you left behind.
SPEED
Apart from clarity, choosing a beneficiary also speeds up the process of distributing assets you left behind. It makes the process of claiming assets as beneficiaries faster and easier instead of waiting for the probate process to finish.
Usually, a named beneficiary can claim assets as soon as the death is legally documented. The beneficiary just needs to present documents such as death certificate and affidavit of domicile to start the process.
Furthermore, a beneficiary designation normally overpowers the instructions in a will — which means they will only apply to certain assets that do not have a particular beneficiary.
CONTROL
Naming a beneficiary or beneficiaries in a will or a life insurance policy is taking control where your assets go once you die. If you fail to name one, the state will be the one to determine how your assets will be distributed to your heirs. The rules differ from one state to another. In fact, in some, ex-spouses may even get a part of what you left behind! Do you see the importance of choosing a beneficiary now?
WHEN YOU WOULD NAME A BENEFICIARY?
Now that you already know what a beneficiary is all about and the importance of having one, let’s proceed to the next important point – when do you name a beneficiary?
You basically name a beneficiary for almost anything that has to do with your money or assets. Some examples include:
- Life insurance policy
- Retirement plans like a 401(k), 403(b), IRA, or similar plans
- Social Security disability (in some cases)
- Savings and checking accounts
- Your last will and testament
Generally, life insurance companies as well as investment firms do not give options to put an age requirement for beneficiaries when listing them. You have to put that instead in your last will and testament.
Meanwhile, here’s a very important matter that you must be aware of. If in case you are participating in an employer-sponsored retirement plan like 401(k), 403(b), or any similar account, based on the law, your spouse automatically becomes your beneficiary. If you, however, intend to name someone else as your beneficiary, you have to get written consent from your spouse.
This law, though, does not apply to IRAs as well as Roth IRAs as those are not set up through employers.
To have a better understanding of your options, it is always best to consult with an investing professional who can walk you through the differences.
HOW TO CHOOSE A BENEFICIARY?
When naming a beneficiary, you must, first and foremost, think about the ones who depend on you financially.
If you are single, this may be your parents or younger siblings. If you are married, it is most likely your spouse who you name as your beneficiary, and the same goes to your spouse. He/She would choose you as well. Together, you would have to choose a secondary beneficiary should the unlikely happen to both of you.
Dependents may not only pertain to family members. Sometimes, even people outside your immediate family may depend on you. This could refer to your parents or your nephew or your niece.
Generally, you can name more than one beneficiary, which means you have to be certain as to how much each of these beneficiaries gets when you die. This way, as we mentioned earlier, there is clarity among family members you left behind or among your beneficiaries.
When choosing a beneficiary or beneficiaries, consider asking yourself the following questions:
- Who depends on you financially? (Whoever they are, they automatically become part of the equation.)
- Should you have kids below 18 years old, who will you appoint as trustee of their money until they reach legal age?
- Are you going to set certain conditions on when your kids can get your assets? (Conditions like he/she has to graduate from college first, turn a certain age, get married, etc.)
- Do you want certain assets (like properties, heirlooms, etc.) to stay in the family?
- Do you want to share assets with certain charities, churches, or nonprofit organizations?
These questions will surely help you decipher who to appoint or name as beneficiaries.
One thing though, while you can choose whoever you want as a beneficiary, it is highly recommended that you review your documents on a regular basis. Take note that there are certain life events that could mean a change in beneficiaries. One best example is when married and you decide to divorce.
Moving on, while naming a beneficiary in your will might sound a big deal and time-consuming, well, think again. Because in reality, it’s not. In fact, you do not even need to go to a lawyer or spend a lot. You can create a will online for just a couple of minutes. All you need to do is to fill in your information, which includes your beneficiaries, and the rest is done on your behalf.
You see, easy, right?
Remember that no matter how big or small your assets are, for peace in the family’s sake, make sure to name a beneficiary.
WHAT ARE THE DIFFERENT TYPES OF BENEFICIARIES?
So, you already know the process of naming a beneficiary. This time, let’s move on to the differentiating the types of beneficiaries.
There are two basic types of beneficiaries. These are the primary and the contingent. Here’s how one differs from the other:
PRIMARY BENEFICIARY
The primary beneficiary refers to the person, people, or organization you name to receive your assets when you die.
As the name suggests, it is the first in line to receive whatever money, property, or any asset you have when you pass on.
Ideally, to make the process easier, you must come up with as much specific information about your primary beneficiary. Information may include the person/people/organization’s current address, as well as contact information and social security number or any similar information if your beneficiary is an organization.
In case you name more than one beneficiary, you need to be particular about how your assets will be split up — or that may cause trouble to your beneficiaries. Instead of using a specific amount with any accounts that could earn interest, use percentages. After all, you’ll never know how much or less you have in your accounts by the time you face death.
CONTINGENT BENEFICIARY
Meanwhile, a contingent beneficiary refers to the person, people, or organization you name in case the primary beneficiary passes away.
The contingent beneficiary or beneficiaries receive your assets if one of all of your primary beneficiaries cannot be located or have passed away already before you do.
In the case of a will or a policy, you will need to be specific as to how your assets would be given out to these beneficiaries. You may choose between two options, which include per stirpes or per capita.
If you choose per stirpes, which comes from a Latin word for roots, then it means you want your assets to be passed down to any children of the primary beneficiaries you choose.
So, for instance, you chose to name your children as a primary beneficiary but one or all of them died, then their share would be passed on to their children.
As with per capita, which is a Latin way of saying “for each head,” this means if one beneficiary dies, the share of that beneficiary goes back to the estate and will be divided among other living beneficiaries.
For example, you have five kids and all of them are your beneficiaries. However, one of them died. So, instead of dividing 100% of your assets to the five of them, it will be divided into four instead — referring to the four living kids.
Now, in case you do not have a contingent beneficiary or let’s say none of the contingent beneficiaries claim the assets you left behind, then the state law will be the one to decide on what’s going to happen to your assets.
Again, if you find things too tricky to understand, you may always opt to talk to experts so you’d be guided accordingly.
HOW TO MAKE MINORS AS BENEFICIARIES?
As much as possible, you leave assets to older members of your family or anyone who’s 28 years old and above. However, if in case you have decided that you are going to leave money to minors, it’s best to speak to an estate planning lawyer.
As pew law, and well, in general, minors are not allowed to get into any contracts. They are not allowed to legally own a property or properties for that matter. Furthermore, they cannot own certain types of accounts.
But then, it doesn’t mean you can no longer leave your assets to a minor. There are certain ways you can do to ensure that your assets go to your minor beneficiary or for his or her benefit. One of the ways is to pre-appoint a trustee.
Basically, a trustee handles the assets on behalf of the minor until such time he or she reaches legal age. The trustee or custodian must act in the best interest of the child, which actually makes it harder to appoint one.
So, we highly recommend you really think hard about this before appointing someone as a trustee or custodian. Make sure to appoint or name someone who you fully trust, and that you are sure he or she will only do what is best for the child – and will not betray your trust.
IMPORTANT REMINDERS
Before we end, we thought it’s best to share with you a few important reminders.
As we mentioned earlier, setting up beneficiaries is not a one-time, big-time thing. You have to make sure you review your beneficiaries on a regular basis. Change it as life happens.
Reviewing your beneficiaries is especially important when vital life events happen like divorce, marriage, birth, as well as death.
However, there are instances when you cannot change your beneficiary. This is applicable to irrevocable trusts or in the case of certain terms in divorce agreements.
In this case, you will need help from experts — your financial planner, and an estate planning attorney — to ensure that your assets will be given according to how you want it to be.
Another important reminder is to never assume that you know how your assets will be distributed. Every financial institution does have its own set of approaches. In fact, some of them may default to a specific option even if you do not ask for that option on a beneficiary designation form.
To be sure, make it a habit to ask the financial institution.
FINAL THOUGHTS ON BENEFICIARY
We all have certain assets in one way or another, and it is important that we become responsible enough in naming a beneficiary or beneficiaries to avoid future conflicts among the people you will leave behind.
Naming a beneficiary or beneficiaries is not tricky, as we have said earlier. In fact, thanks to technology, you can make one now online, which only lasts for a couple of minutes. Once you’re done doing it, make sure to check and keep an eye of your will every now and then especially during life changes. Make changes if necessary.
Have you named a beneficiary or beneficiaries of your assets yet?