Remember watching a show or a movie where the head of the family dies leaving all the property and assets behind for his or her favourite grandchild who he or she has mentioned in a will, making the grandchild the beneficiary. Then the whole family either accepts their fate or turns against the grandchild for the money. But no matter what they do, they cannot legally claim anything because the person has made the grandchild the beneficiary. So what exactly is this beneficiary, and why is it so important? This is exactly what we are going to try to understand by breaking down the term and getting a little familiar with it so that you are a little more confident and firm the next time you face a situation where you have to name or choose a beneficiary.
What is a Beneficiary?
In literal terms, a beneficiary is any person that gains profits or advantage from something. When talking about the financial world, a beneficiary is a person who is entitled to get distributions from a trust, will or life insurance policy. Beneficiary can be a person or organisation that has been named in the legal documents like a will or a life insurance policy to receive all your assets and wealth in case you are no more. There is no limitation of choosing a relative as a beneficiary and you can also choose more than one beneficiary if you want.
Beneficiaries are named in several places including life insurance policies, last will or testament, retirement plans, social security disabilities, and savings and checking accounts. A beneficiary can be anyone including one person or multiple people, a trustee of any trust that you have set up, a charity organisation, a minor child, or in case of life insurance policy, the beneficiary can even be your estate.
When you name someone as your beneficiary and make them eligible for getting your assets and property after you, it makes you the benefactor. As the benefactor who originally owns these said assets or property, you have certain rights which you should know before choosing and naming the beneficiary. These rights are as follows:
- The benefactor can name anyone as the beneficiary without any obligations of the beneficiary being his or her relative or blood relation.
- The benefactor can also change the beneficiary at any time with all the necessary paperwork, if they feel so.
- The benefactor can set conditions on when and how the beneficiary receives the said distributions, assets or properties. This means that you as a benefactor can decide if the beneficiary can get the distributions, assets or property on reaching a certain age or on marrying.
- The benefactor can name more than one beneficiary and divide the distributions among them, but it needs to be specified as to who gets what.
Why do you need a beneficiary?
There are many reasons as to why you would need a beneficiary. The most important one among them is that the money that you put in is your hard earned money which you would want to keep safe and put to use for your families benefits and wellbeing. Apart from this some other reasons as to why naming a beneficiary is important are clarity, speed and control.
Naming a beneficiary will give all the family members a clarity about where your money and assets are going which will help to maintain the peace within the family and save them from going against each other for the said money or assets. If you do not name a beneficiary, the dispute over your funds will make them useless for your family members and they will have no legal right to use the funds unless the court says otherwise. On the other hand, naming a beneficiary will speed up the whole process and make it possible for your family members to use the money in case of emergencies once all the legal formalities have been taken care of.
The process of naming a beneficiary also gives you a certain control over where your money goes even after your death. As discussed above, the rights of the benefactor allows you to decide when, where and who gets your money and assets. If you don’t name a beneficiary, you lose that control and it is left up to the court and the state to decide how your property will be distributed among the heirs.
Types of Beneficiaries
There are two main types of beneficiaries—primary beneficiary and contingent beneficiary. We will go through each of them individually to understand what they mean.
Primary Beneficiary Primary beneficiary is the first in line to receive your money or assets when you are no more. Although it might seem obvious that this person should get your assets once you die, it is still important to specify it in your will and give all the necessary details of the person to make the whole process a lot easier and smooth. If you want more than one person as your beneficiary, make sure that you provide details of both these people and specify how you want the assets to be distributed among them so that there is a clarity as to who gets what.
Contingent Beneficiary A contingent beneficiary is a person who receives your money or assets in case your Primary beneficiary passes away before you do or if they cannot be found. While naming a contingent beneficiary in your will you will need to lay out how your assets should be given to these beneficiaries. This can be done per stirpes or per capita. If you choose the per stripe option, it means that you want your assets to be passed down to any of the children of the beneficiaries that you choose. However, if you choose per capita, it means that your inheritance will go back to the estate and will be divided among other living beneficiaries.
When choosing your beneficiary it is important for you to consider who is dependent on you financially and who you want to benefit the most from your assets. If there is no one in your family or loved ones who you want your inheritance to go then you can simply pass it on to a charity or non-profit organisation. All in all the choice of beneficiary is completely yours and you have a freedom to choose whoever you want.
