What is a beneficiary?

A beneficiary is a person designated to be the recipient of benefits or profits. In finance, the term is typically used to refer to a person or entity that is eligible to receive proceeds from a trust, life insurance policy or will upon the holder’s death. A beneficiary can be named specifically in the related documents or meet the stipulated conditions that make him or her eligible to receive the specified distribution.

Deeper definition

Typically, any entity or person can be named as a beneficiary of a will, life insurance policy or trust, and the individual distributing the funds, known as a benefactor, can put stipulations on how the funds are disbursed. These conditions could include requiring that the beneficiary be a certain age, or married. Depending on the type of benefit, there may also be tax implications to the beneficiary. For instance, although the principal of a life insurance policy is not taxed, interest accrued may be taxed.

Although designating beneficiaries can be complex, it is essential if you need the proceeds of an insurance policy or annuity to be passed on directly to a specific person or entity without being subject to probate or your will. You should also note that a named beneficiary is not necessarily an individual; it could be your estate. In this case, beneficiaries are designated within the will.

A benefactor has the final say as to who receives his death benefits. The primary beneficiary is the individual who is first in line to receive them. If a primary beneficiary dies before the benefactor, there is usually a contingent or secondary beneficiary who is next in line. The benefactor may also choose a final beneficiary for cases where both the primary and secondary beneficiaries have died.

Deciding who are the primary and secondary beneficiaries is a personal choice. There are several factors to consider before the decision is made: Do you have anyone who is dependent on you for financial support? Are there people who must bear certain expenses in the event of your death? In any case, you are free to change your beneficiaries at any time. It is important to review your will or life insurance policy regularly so you can make the necessary adjustments when certain aspects of your life change, such as marriage or the arrival of a baby.

Qualified retirement savings plans, including 401(k)s, profit-sharing plans and employee stock ownership plans, or ESOPs, will almost always offer a benefit that is payable to the participant’s beneficiary after the death of the participant. If there is no designated beneficiary on file, the plan’s agreement normally contains a provision for a default beneficiary. Unfortunately, the plan’s default beneficiary may be contrary to the wishes of the participant. This is why designating primary and secondary beneficiaries is an important part of estate and retirement planning.

Example of beneficiary

A non-qualified annuity is considered a tax-deferred investment that allows the owner to name a beneficiary. Upon the owner’s death, the investment is passed on to the beneficiary, who may be liable for any taxes due on the death benefit. Unlike a life insurance policy, the death beneficiaries of annuities are liable for taxes on any gains they receive above the original amount invested by the benefactor. For instance, if the original owner bought the annuity for $150,000 and died when its value was $200,000, then the beneficiary is taxed on the $50,000 gain as ordinary income. The gain is referred to as “income in respect of decedent,” or IRD. If the beneficiary plans for it, the IRD gain amount can be paid over several years after the benefactor’s death as an “inherited non-qualified annuity.”

Other Smart Money Terms

Estate plan

An estate plan is a financial planning tool. Find out more at

Primary care network

Primary care network is an important term to know. Bankrate explains it.

Floor models

Floor models can help consumers make product choices. Find out more.

Soft inquiry

A soft inquiry, or soft pull, is a preliminary credit inquiry. Bankrate explains it.

More From Bankrate