What Is a Beneficiary? Your Essential Guide

When you opened your first retirement account, you probably didn’t lose sleep over understanding what is a beneficiary, or who you should name when you filled out that account application.

Worrying about beneficiaries can feel almost trivial when you’re a newly-minted adult—unmarried, without dependents, and still on your way to building up significant assets.

But that was then. And now?

Now, with a significant other, children (or thoughts of growing your family on your mind), and a growing net worth, you need to be sure you’re clear on:

• What is a beneficiary—and what’s the difference between who you name as primary and contingent
• Where you can name a beneficiary—and, just as importantly, where you actually can’t list a formal beneficiary on an investment account
• How your finances or your family could be negatively impacted if you fail to name beneficiaries on your retirement and other financial accounts
• When you need to review your financial plan and potentially make changes to your beneficiaries

Why does all of this matter so much?

If you pass away without properly naming your beneficiaries, money that should be supporting family members or loved ones in your absence could be eaten up by taxes and legal fees.

And when time is of the essence, lengthy and otherwise avoidable legal proceedings can prevent your dependents from being able to access money when they need it the most.

So let’s review what beneficiaries are, what types of accounts and policies require or allow you to name beneficiaries, and what can happen if you fail to name them properly.

Key Takeaways from This Guide on What Is a Beneficiary (and Why Who Yours Is Matters)

• Definition of a beneficiary: A beneficiary is the individual, institution, or entity designated to receive assets, property, or benefits upon your death, or from a trust or will. Beneficiaries can be primary (first in line) or contingent (who receives assets after the primary beneficiary or if the primary benficiary cannot receive them).
• Why choosing and naming beneficiaries matters for your financial plan: Naming beneficiaries is a fundamental component of effective estate planning and financial management, because it provides a legal pathway for ensuring your wishes are honored.
• Having the appropriate estate plan also helps avoid the hassle and expense of probate court: Properly named beneficiaries can help assets bypass the often lengthy and costly probate process, leading to a faster distribution to your loved ones. Probate court is also matter of public record, so avoiding it provides more privacy.
• Creating an estate plan or naming beneficiaries shouldn’t be a set-it-and-forget-it task: Life events (marriage, divorce, birth of children, death of a beneficiary) necessitate reviewing and updating your beneficiary designations to ensure they align with your current wishes.

What Is a Beneficiary?

A beneficiary is who—or what—you name to receive your assets or a particular benefit when you die.

If you name a beneficiary on a life insurance policy, then that person will receive the death benefit of the policy. If you name someone as a beneficiary to your 401(k) or IRA, then they will receive those assets upon your passing.

You can designate just a single person as your beneficiary, or you can list several. You can have two primary beneficiaries who split the assets a specific way (i.e., each listed receives 50% of the account’s balance), or you can add contingent beneficiaries who would receive those assets if your primary beneficiary predeceases you.

Why Naming a Beneficiary is Crucial for Your Financial Plan

Understanding what is a beneficiary means you also know what happens when you don’t have one. Usually, that means forcing surviving family members to rely on the probate court to sort out who will receive the assets (money, property and possessions) you leave behind.

The probate process can be lengthy, expensive, emotionally exhausting, and a matter of public record. For that reason, most people don’t want to leave their families and friends dealing with the court—but they don’t have a choice if you don’t name beneficiaries where appropriate or fail to create an estate plan.

Depending on your state, avoiding probate entirely might not be possible. Probate isn’t an inherently bad thing; its purpose is to validate last wills and testaments, appointments of estate executors, and help manage the proper distribution of assets.

That’s important, and it’s a much smoother process if you have an estate plan and the correct beneficiaries listed on insurance policies and financial accounts.

There are various strategies for structuring your beneficiaries, which makes it extremely important to understand exactly what a beneficiary is and why you need to name them. And, determining precisely what you should do with your own accounts is a critical piece of good estate planning.

Given that a beneficiary doesn’t even have to be a person—it can be an entity like a trust or charity – it’s well worth developing a sound plan with legal documents that will hold up in the courts of your state.

Beneficiaries Aren’t Set in Stone—and Might Need to Change with Time

Keep in mind that once you name someone to receive your assets or the death benefit of an insurance policy, you’re not stuck with that setup forever. You can change the designations—and reviewing those proactively is a big part of smart financial planning.

We help our financial planning clients review and make changes to their beneficiaries on a regular basis so that changes in circumstances or various life events are reflected in how their accounts are set up.

For example, families who already have one child may have that son or daughter listed as the contingent beneficiary on a retirement plan (while the spouse is the primary). But they may not necessarily think about adding the second child once they grow their family.

Most people simply don’t sit around thinking about this kind of thing, so it’s easy to forget. Failing to update your accounts, however, means that your first child will receive all your assets… while your second child does not receive anything.

That’s a situation most of us want to avoid, which is why looking over who is listed as your beneficiary on at least an annual basis is so important.

Be Sure to Name Beneficiaries to These Accounts and Entities

There are a number of accounts, policies, and estate planning documents in which you’ll need to name a beneficiary, including:

• Qualified retirement plans like 401(k)s,, 403(b)s and IRAs
• Health savings accounts
• Life insurance policies
• Wills and trusts

You can’t slap a beneficiary on something like a house, or valuable jewelry directly. If you have numerous high-value assets outside of the above-named financial accounts, you may want to establish a trust that can establish who should receive those items in the event of your death.

We highly recommend speaking to an estate planning attorney about your specific situation to determine how to structure your will and decide if you need a trust as well.

That will help ensure you create a legally-defined process for how and to whom your assets are distributed upon your death.

For life insurance, we typically suggest looking at term life. The purpose of this kind of coverage for most people is to protect someone who is financially dependent on you against financial hardship should something happen to you (and therefore, the income you provide for them).

The person you name as your beneficiary to the policy is the person who will receive the benefit if you passed away during the policy’s term period.

401(k) plans, 403(b) plans, and IRAs (including traditional, Roth, SEP, and SIMPLE) also require you to name a beneficiary in the event of your death. If you’re married, that primary beneficiary might need to be your spouse unless your spouse gives specific consent to name another party.

If you have kids, you might name your spouse as the primary beneficiary and either your children or the family trust as the contingent beneficiary on these accounts.

This isn’t an exhaustive list of all the places you could possibly designate a beneficiary to your assets or valuables. Again, that’s why we suggest working with an estate planning attorney to set your specific plan in place.

We consider estate planning to be a piece of general protection planning (which also includes conversations about what insurance coverage is appropriate and what is too much for you and your family).

This type of protection planning is a critical component of a truly comprehensive financial plan that takes all angles of your financial life into account.

Where You Can’t Name a Beneficiary

Naming a beneficiary is easy when it comes to 401(k)s and IRAs. You can either list those on the account application when you open the account, or you can go back to the plan administrator or custodian to request additions or changes.

And you must name a beneficiary when you take out a life insurance policy. That makes sense given the whole purpose of something like term life is to provide a financial benefit to a person or entity if you pass away!

But you can’t list a specific beneficiary directly on all financial vehicles. A brokerage account, for example, can be a jointly-owned account… but you cannot list a beneficiary.

If you open a joint brokerage account with your spouse, for example, you might designate that account “joint ownership with rights of survival.” That simply means that if one of you passes away, the assets are wholly owned by the surviving spouse.

Note that this does depend on the state in which you live and own assets, and the relationship you have with the joint owner. If you are in a community property state, as just one example, this designation may not apply or be appropriate.

Once again, the fact that you may choose a different type of joint ownership underscores the importance of working with an estate planning attorney in your state to ensure everything is set up properly. Educating yourself is a great start… but these matters are too important to try and DIY.

Any good financial planner will tell you the same. We might be experts in financial planning, but there’s a difference between planning and investment management, and legal advice.

(What we can do as financial planners is give clients access to our network of professionals, which include recommendations to CPAs, insurance brokers, and a variety of attorneys.)

Back to beneficiaries on brokerages: If both you and your spouse were to pass away without a will or trust, there’s no predesignated party that would receive those assets. They would be part of your estate that would need to go through probate to settle who would receive what from your assets based on state regulations.

Bank accounts are another financial account type that have less clear beneficiary guidelines than qualified retirement accounts or insurance policies.

What you may be able to do with your investment or bank accounts is to establish a transferable-on-death (TOD) or payable-on-death account (POD) account.

If you’d like to do this, you’ll need to fill out a Totten Trust form with the institution where your account is located. This authorizes the transfer of your money directly to your beneficiary upon your passing.

Other Ways to Protect Your Loved Ones

Besides properly naming beneficiaries, there are other avenues to make sure the people you care about will be financially supported in the event of your death—and that your assets will be distributed in the way you wish.

The estate planning process can help you establish the proper legal documents and channels to handle your assets and pass them along to others once you’re no longer here to watch over that wealth and ensure it’s used the way you want.

Estate planning can help you set up wills, trusts, healthcare proxies, powers of attorney, and more. What your specific estate plan needs depends on your goals, your family structure, your assets and the state in which you primarily reside.

How to Manage Your Beneficiary Designations Over Time as Your Life Evolves

Naming beneficiaries might seem like a one-time process that you’re locked into for life—but thankfully, you can change beneficiaries as your life changes too.

In fact, major life changes or milestones are exactly when you need to consider whether or not who you initially named as a beneficiary should still be listed as such.

Of course, the chaos of a new child, marriage, divorce, or death can mean that individuals forget to change beneficiaries when necessary.

But failing to update beneficiaries can result in time-consuming and expensive legal processes for those who are the intended inheritors—and in worst-case scenarios, those individuals may not receive anything at all.

And naming the wrong beneficiary can create even more of a legal mess to contend with.

Typically, beneficiary designations supersede a will or a trust. For example, if you get remarried, and you update your will but not your beneficiaries, your ex-spouse could inherit assets for which they’re still listed as a beneficiary.

Clearly, there’s a lot to think about here—and a lot to remember when it comes to keeping everything updated and accurate.

While major life events can trigger a reminder to check out your beneficiaries, it makes things a lot easier when you have a comprehensive financial plan in place with an advisor who proactively manages these concerns for you.

Frequently Asked Questions About Beneficiaries

1: What is a beneficiary?

A beneficiary is the person or entity you name to receive money or assets from your accounts, such as life insurance policies, retirement accounts (like 401(k)s and IRAs), and trusts, after your death.

2: What is the difference between a primary and a contingent beneficiary?

A primary beneficiary is the first person or entity in line to receive the assets. A contingent beneficiary is the alternate, designated to receive the assets if the primary beneficiary is unable or unwilling to do so (for example, if they predecease you).

3. Why is it important to name a beneficiary?

Naming beneficiaries ensures your assets are distributed according to your wishes, avoids the lengthy and potentially costly probate process for those specific assets, and provides financial security for your loved ones after you’re gone.

4. Can I name more than one primary beneficiary?

Yes, you can name multiple primary beneficiaries and designate the percentage of the assets each will receive. You can do the same with contingent beneficiaries.

5. What happens if I don’t name a beneficiary on an account?

If you don’t name a beneficiary, or if all named beneficiaries predecease you, the assets typically go to your estate and will be subject to probate. This can delay the distribution of assets, create public records around your estate, make it easier for other parties to create disputes around how your assets will be distributed, and potentially incur additional legal fees.

6. Do beneficiary designations override my will?

For accounts with specific beneficiary designations (like life insurance, 401(k)s, and IRAs), the beneficiary designation on the account generally supersedes any instructions from a will.

7. How often should I review my beneficiary designations?

You should review your beneficiary designations after any major life event, such as marriage, divorce, the birth or adoption of a child, the death of a beneficiary, or significant changes in your financial situation or wishes. It’s also a good practice to review them every few years to confirm the initial structure still fits with your wishes.

8. Can I name a trust as a beneficiary?

Yes, you can name a trust as a beneficiary, which offers more control over how and when assets are distributed, especially if you have minor children or beneficiaries with special needs. Setting up a trust may or may not make sense for your specific situation, so consult with a financial advisor and an estate planning attorney to ensure you’re taking the right steps to protect yourself, your family, and your assets.