beneficiary

Beneficiary

A beneficiary is a person or entity that is designated to receive money, assets, or other benefits from a financial account, insurance policy, trust, or estate. In banking and finance, the term typically refers to someone named to inherit the funds in an account when the account holder passes away or when a specific condition is met.

You can generally name one or more beneficiaries on accounts such as savings accounts, checking accounts, retirement accounts, and life insurance policies. In most cases, you can also name a contingent beneficiary, which is a backup person who receives the funds if your primary beneficiary is no longer living or is unable to accept them.

Why it matters

Naming a beneficiary is one of the most important steps in financial planning. When a beneficiary is properly designated on an account, the funds in that account typically transfer directly to that person without going through probate, which is the legal process of settling an estate. This can save your loved ones significant time and legal costs.

It is generally a good idea to review your beneficiary designations regularly, especially after major life events such as marriage, divorce, the birth of a child, or the death of a previously named beneficiary. An outdated designation can result in funds going to someone you no longer intend to receive them.

Example

Suppose you open an individual retirement account (IRA) and name your spouse as the primary beneficiary and your child as the contingent beneficiary. If you pass away, your spouse would typically receive the full balance of the IRA directly from the financial institution. If your spouse had already passed away, the funds would generally transfer to your child instead. In most cases, neither transfer would require going through probate court.

Related terms

• Contingent beneficiary: A secondary person named to receive assets if the primary beneficiary cannot.
• Payable-on-death (POD) account: A bank account that transfers directly to a named beneficiary upon the account holder’s death.
• Trust: A legal arrangement in which one party holds and manages assets on behalf of a beneficiary.
• Estate: The total of all assets and liabilities left behind by a person after death.
• Probate: The legal process through which a deceased person’s estate is administered and distributed.