WHERE THERE'S A WILL,
There's A Way, for Those Left Behind, to Find Peace Of Mind!
Beneficiary graphic showing money a hand dropping a bag of money into another hand

What Is the Meaning of Beneficiary?

Beneficiary is a term that is often used in legal, financial, and insurance contexts. It refers to an individual or entity that receives benefits from a particular arrangement, such as a will, trust, or insurance policy. In this blog, we will explain what is the meaning of beneficiary, its various applications, and how it impacts different parties.

What is a Beneficiary?

A beneficiary is a person or entity that receives benefits from a particular arrangement. The term is most commonly used in legal and financial contexts, such as wills, trusts, and insurance policies. For example, a person may name their spouse as the beneficiary of their life insurance policy, meaning that the spouse will receive the policy’s benefits if the person dies.

Policies that Commonly Have Beneficiaries

The following list of policies commonly have beneficiaries:

Life Insurance:

A policy that pays out a lump sum of money to the designated beneficiary(ies) upon the death of the insured person.

Retirement Accounts:

Accounts like 401(k)s, IRAs, and pensions that allow individuals to save money for retirement. The designated beneficiary(ies) receive the remaining funds in the account after the account owner’s death.

Annuities:

A financial product that pays out a fixed sum of money at regular intervals for a predetermined period or for the rest of the annuitant’s life. The designated beneficiary(ies) receive the remaining funds in the annuity after the annuitant’s death.

Health savings accounts (HSAs):

Accounts that allow individuals to save money for medical expenses. If the account owner dies, the designated beneficiary(ies) inherit the remaining funds in the HSA.

Will:

A legal document that outlines how a person’s assets will be distributed upon their death. The beneficiaries named in the will receive the designated assets.

Pension Plans:

A type of retirement plan where an employer contributes funds to a pool of funds set aside for an employee’s future benefit.

Trusts:

A legal arrangement where a trustee manages assets for the benefit of one or more beneficiaries according to the terms and conditions set out in a trust agreement.

POD Bank Accounts:

Payable On Death bank accounts allow individuals to name beneficiaries who will receive the account funds upon the account holder’s death.

TOD Stocks and Securities:

Transfer On Death securities allow individuals to transfer ownership of stocks and securities to beneficiaries upon the individual’s death.

Real Estate TOD accounts:

Transfer On Death real estate accounts allow individuals to transfer ownership of real estate property to beneficiaries upon the individual’s death.

Health Savings:

An individual uses a tax-advantaged savings account in combination with a high-deductible health plan to pay for qualified medical expenses.

Disability:

Disability insurance provides income to an individual who becomes disabled and is unable to work due to injury or illness.

Types of Beneficiaries

There are several types of beneficiaries, including primary, contingent, and residuary beneficiaries.

Primary Beneficiary:

A primary beneficiary is the person or entity that is designated to receive the benefits of a particular arrangement, such as a will or trust. If there is more than one primary beneficiary, the benefits are usually divided equally among them.

Contingent Beneficiary:

A contingent beneficiary is a person or entity that will receive benefits only if the primary beneficiary is unable to do so. For example, a person may name their spouse as the primary beneficiary of their life insurance policy, but if the spouse predeceases them, the benefits would then go to a contingent beneficiary, such as a child.

Residuary Beneficiary:

A residuary beneficiary is a person or entity that receives any remaining benefits from an arrangement after all the other beneficiaries have received their share. For example, a person may name their children as the primary beneficiaries of their estate, but if any assets remain after the children have received their share, those assets would go to the residuary beneficiary.

How Beneficiary Affects Different Parties

Beneficiary arrangements can have significant implications for the parties involved, including the grantor, the trustee, the policyholder, and the beneficiary.

Grantor:

The grantor is the person who creates the arrangement, such as a will or trust. The grantor may choose to name certain beneficiaries for various reasons. Examples of such reasons include providing for family members or supporting charitable organizations.

Trustee:

The trustee is the person or entity that manages the assets of the trust for the benefit of the beneficiaries. They have a fiduciary duty to act in the best interests of the beneficiaries. The trustee is also responsible for managing the trust’s assets prudently.

Policyholder:

The policyholder is the person who purchases the insurance policy and designates the beneficiaries. The policyholder may choose to name a spouse or children as the primary beneficiaries. This is often done to ensure that they are provided for in the event of the policyholder’s death.

Beneficiary:

The beneficiary is the person or entity that will receive the benefits of the arrangement. The beneficiary may have different rights and obligations depending on the type of arrangement and the specific terms of the arrangement.

For example, a beneficiary of a trust may have the right to receive income from the trust or to receive the trust’s assets at a specified time in the future. The beneficiary may have the right to challenge the actions of the trustee. This right can be exercised if they believe that the trustee is not acting in their best interests.

Similarly, a beneficiary of an insurance policy may have the right to receive the policy’s benefits if the policyholder dies. The beneficiary may also have certain obligations, such as the obligation to provide proof of the policyholder’s death in order to receive the benefits.

Beneficiary vs Heir

Beneficiary and heir are two terms that are commonly used in legal and financial contexts, but they have different meanings.

A beneficiary is someone who is designated to receive the benefits of a particular legal or financial arrangement, such as a trust, life insurance policy, or retirement account. The person who creates the arrangement typically names the beneficiary. Also, the beneficiary’s rights and obligations are defined by the terms of the arrangement. For example, a beneficiary of a trust may have the right to receive income from the trust or to receive the trust’s assets at a specified time in the future.

An heir, on the other hand, is someone who is entitled to receive a portion of a deceased person’s estate under the laws of intestacy. If a person dies without a will or other estate planning documents, the laws of their state will dictate the distribution of their assets to their heirs. Heirs can include spouses, children, parents, siblings, and other close relatives.

Differences of Beneficiary vs Heir:

Beneficiaries and heirs may both receive benefits or assets from legal or financial arrangements. However, there are several key differences between the two:

    1. Designation: The person who creates the legal or financial arrangement typically designates the beneficiaries. The laws of intestacy determine the heirs.
    2. Timing: Beneficiaries may receive benefits or assets during the lifetime of the person who creates the arrangement. Heirs, however, typically receive assets after the person’s death.
    3. Control: Beneficiaries generally have little or no control over the legal or financial arrangement that benefits them. Heirs, on the other hand, may have some control over the distribution of their inheritance if the deceased person has left a will or other estate planning documents.
    4. Taxation: The tax implications for beneficiaries and heirs can be different. For example, if a beneficiary receives assets from a life insurance policy, the proceeds may be tax-free. However, an heir who inherits assets from an estate may be subject to estate taxes.

Explore Comprehensive Last Will Management with The U.S. Will Registry

Discover our range of services: Free Will Creation, Free Will Registration, Missing Will Search, Free iCloud Storage and Free Death Notices, and Obituaries.
Create and Safeguard your will and ensure peace of mind.

Scroll to Top