Financial Jargon Defined: Beneficiary

The world of finance and investments is notorious for its extensive use of jargon. With a goal of enhancing financial literacy and making the finance world more transparent, we are rolling out a “monthly jargon” post that will focus on debunking the financial terms that are continuously tossed around sans explanation. This month, we are addressing a term that people often overlook: beneficiary. People frequently do not realize the importance this term deserves, and the implications beneficiaries have on one’s financial life. Put simply, a beneficiary refers to who gets your assets. Typically, you can name any person or entity a beneficiary of a trust, will, life insurance policy, annuity, and other financial accounts. Properly naming beneficiaries is the single most important action you can take to ensure your assets are passed onto the right people when you die.

When you think of beneficiaries, you most likely think of a will, but the term, more importantly, applies to many other aspects of your finances. You can be very specific in terms of who gets what in a will; however, when it comes to your retirement accounts, life insurance, annuities, and other financial accounts, you have to name beneficiaries for each account and policy to ensure these assets go to the right people.

There are two main types of beneficiaries: primary and contingent. A primary beneficiary is an individual or entity to first receive benefits upon the account holder’s death. An individual can name multiple primary beneficiaries and specify how distributions should be allocated. A contingent beneficiary is an individual or entity that is second in line to receive benefits. In other words, the contingent beneficiary only receives assets if he or she outlives the primary beneficiary or if the primary beneficiary refuses the inheritance or cannot be located.

In addition to naming primary and contingent beneficiaries, you will choose if the beneficiaries are “per capita” or “per stirpes.” These designations only come into play if a beneficiary predeceases the owner of the assets. Per capita means that the share of the assets intended for the deceased beneficiary will be equally distributed to the other beneficiaries so that all living beneficiaries receive equal shares of the assets. With a per stirpes designation, the inheritance intended for the deceased beneficiary goes to the deceased beneficiary’s heirs. Because of this, per stirpes is used more commonly in estate planning than per capita because it covers the typical family circumstance.

On a final note, always remember to periodically review your beneficiary elections across all of your accounts and policies to ensure your elections accurately reflect any major events or changes in your life. This is especially important because in most cases, beneficiary designations of insurance policies and accounts like 401(k)s and IRAs trump the designations in a will. If you do your due diligence and name your beneficiaries properly, your beneficiaries will be able to get the assets intended for them directly without having to deal with the courts and a probate process that could leave your assets in the hands of the wrong people.