What’s a beneficiary?

A beneficiary is basically the recipient who receives anything you want to leave behind. If you receive something from a will, you would be a beneficiary. When it comes to life insurance, a beneficiary is a recipient of the policy’s death benefit (aka pay out). Beneficiaries are used for other things such as wills, 401ks, and even bank accounts.

Now, life insurance beneficiaries don’t just have to be flesh-and-blood people. You can name charities, trusts, businesses, or estates as beneficiaries on your life insurance policy. It all comes down to your specific wants and needs as a policyholder. You can even name multiple beneficiaries and specify how much goes to which recipient.

Primary & contingent beneficiaries

A primary beneficiary is like what we said above: the recipient or recipients of the death benefit of your policy. They’ll have first claim of the pay out. 

Contingent beneficiaries, on the other hand, are recipients of your policy in the event that the primary beneficiary is unable or unwilling to receive the death benefit. A primary beneficiary doesn’t have to die for contingents to receive the payout either. As long as the primary beneficiary doesn’t receive the payout, contingents are activated, so to speak.

If a beneficiary dies, who gets the money?

Let’s do a hypothetical. What happens if one of the primary beneficiaries dies? Let’s say it’s your spouse but you both die suddenly. If you haven’t named any contingents, the death benefit would go into your estate and then through a probate court. There, the money would be open and could be seized by creditors.

This is important because, if that money had gone to a beneficiary, creditors wouldn’t be able to seize it or make any claims on it. However, under probate court, creditors can make claims. So things like student loans, medical and credit card debt could be taken by creditors without a named beneficiary. 

If you named contingent beneficiaries, the payout would go to them. Now, with contingent beneficiaries, the distribution of the funds would generally fall under two methods: per stirpes or per capita. What are those exactly?

Per stirpes & per capita beneficiary distribution

Per stirpes and per capita are different distribution types when it comes to payouts. “Per stirpes” is Latin for “by branch,” referring to a family tree (branch, tree, get it?). Per stirpes distribution is where the payout is divided equally amongst the beneficiaries. So if you have two recipients, Ken and Barbie, they’d each get 50%. If Ken were to die, his descendants would receive a split of his pay out and Barbie would still receive her 50%. This model is often used to protect grandchildren who’ve lost a parent.

Per capita distribution, on the other hand, means “for each person” or “by head.” So let’s say you and Barbie die together. The payout funds would be distributed equally amongst all the beneficiaries listed on the policy. So if you have three beneficiaries, Ken, Barbie, and Tracy, but you and Barbie died together, Ken and Tracy would then receive 50% of the payout. 

Ways to protect your beneficiaries & assets

Whether you have a life insurance policy, 401k, or even a bank account, you’ll want to get ahead of any problems when it comes to your beneficiaries. As stated above, when you don’t name a beneficiary, your assets will go into your estate and then into probate court. There, they’ll be subject to procedures and charges by the court. What happens to 401k when you die without a beneficiary? It goes into your estate and then also to probate court. What happens to a bank account when someone dies without a beneficiary? Your executor becomes responsible for the money to pay off creditors and dividing the rest according to your will. 

So how do you protect yourself and your loved ones? For one, name primary and contingent beneficiaries. That way, even if the worst were to happen, your assets have a place to go that will keep them safe from creditors. This includes regularly updating your beneficiary list in the event of any major life changes. And, in the case of life insurance, keep your policy updated. For example, our Wysh Granter team is available to walk you through any policy updates you need. Flexible term life plans allow your policy to grow with you and your needs, so you’re always prepared.