What is Beneficiary in Banking, Its Importance and How to Assign One?
Having a plan to tackle unforeseen emergencies affecting your family’s financial stability is highly important. While you may have a decent nest egg in your bank account, it is important that your next of kin is named a beneficiary in these accounts. Having a beneficiary for your bank account will ensure your next of kin or family can easily claim your bank account following your demise and secure their future.
Let’s explore more about what a beneficiary is, its importance, how to add a beneficiary and more. Read on!
What is a Beneficiary?
A beneficiary is a person or group of people you choose who would receive your possessions in the unfortunate event of your death. You can assign beneficiaries in a legal document, such as a will, a trust, a life insurance policy, an annuity, or a retirement account.
You can assign any of the following listed below as your beneficiary.
- a person (or multiple people)
- a trustee of the trust that you’ve established.
- a nonprofit organisation or charity
- a minor (child under 18 years of age)
- your estate (in the case of a life insurance policy)
A named beneficiary is a person (or entity) who receives the advantages of property that belongs to another person. These benefits are frequently given to beneficiaries as a part of an inheritance. Your financial assets should have beneficiaries designated to be distributed according to your will after death.
What is a Beneficiary Account?
A beneficiary bank account is a savings account that transfers the money to another person after the account owner passes away. Name beneficiaries can be for bank accounts, life insurance, retirement accounts, and other assets. Furthermore, a beneficiary is someone you want to receive your estate after you pass away.
By setting up a beneficiary bank account, you can prevent future legal disputes over the funds in your bank account. Your assets might be subject to probate if you don’t have a beneficiary bank account.
Probate is a legal procedure used to determine the validity of a will or trust or, in the absence of a will, who would inherit your estate. If you have a beneficiary account with funds available, it will automatically be transferred to the assigned beneficiary.
It could help your family pay for funeral expenses and continuing obligations like rent, loans, and utility bills. However, your account is not accessible to beneficiaries while you are still alive. Furthermore, your beneficiary’s creditors cannot access the money in your account if they face charges, taxes, or significant debt.
How Do Bank Account Beneficiaries Work?
The beneficiary won’t be able to access the accounts or make deposits or withdrawals while the owners are still alive. Beneficiaries of bank accounts will not have access to the funds until all account holders have passed away.
More importantly, for your beneficiary to access your bank account after your death, they must present a copy of your death certificate to the bank account. Furthermore, the bank account beneficiary is not obligated to make up any unpaid balance if you have one at the time of your death. Simply put, the individual wouldn’t receive any money.
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Why is It Important to Choose a Beneficiary?
Listed below are the primary reasons for choosing a beneficiary for your bank account:
• Direct Your Assets as You Wish
When you assign a beneficiary in banking institutions, you can direct your funds how you want, ensuring that the people you designate receive your money. Furthermore, it provides the financial stability of the person you assign as the beneficiary.
• Avoid Conflict Over Funds
By designating a beneficiary, conflict can be avoided, whether in the courtroom, which can be expensive, or between family members fighting over a share of your wealth. Generally, it establishes a mechanism for transferring your assets to those you wish.
• Reduce Legal Interference
By designating a beneficiary, you could also avoid the probate court’s lengthy processing times, which, in particularly challenging circumstances, could lock up assets for years.
Types of Beneficiaries
Primarily, there are two types of beneficiaries, including the following:
• Primary Beneficiaries
The initial beneficiary selected by the owner of a bank account is known as the primary beneficiary. This individual or organisation will receive all the assets in an account, even though other beneficiaries may also be specified in an account or estate records documents.
• Contingent Beneficiaries
Secondary beneficiaries include contingent beneficiaries. They get the account benefits if the principal beneficiary is no longer alive or is untraceable. Furthermore, you may specify more than one contingent beneficiary and how the assets will be distributed among them.
Why Do You Need a Beneficiary?
Here are the prominent reasons why you should assign a beneficiary to your bank account:
- Choosing beneficiaries gives you control over what happens to your money. It makes the situation clear for everybody who might be affected.
- Having heirs makes settling your estate more manageable and can help people you leave behind experience less financial stress.
- Any modifications will not impact beneficiaries of financial accounts like insurance policies or retirement accounts. Priority is always given to these explicit designations.
- The recipients or named beneficiaries are not disclosed in the financial account records. The heirs become vulnerable to public scrutiny when a will becomes general knowledge.
How to Add a Bank Account Beneficiary?
Most financial institutions allow customers to open beneficiary accounts with a simple process of adding a beneficiary to an already-existing account. You only have to visit a bank or their website and follow the instructions on your screen to open an immediate bank account. Another option is to go to your local bank branch and request that they open an account for you.
Unlike other accounts, including IRAs, it’s mandatory to name a beneficiary. A bank account does not need to have a designated beneficiary. Most financial institutions now offer beneficiary accounts ‘payable on death,’ or POD accounts, as a standard feature on checking, savings, and money market accounts.
How to Choose a Beneficiary?
When choosing your beneficiaries, remember those who need the funds and whether one recipient might gain more from one type of beneficiary account than another.
A competent financial advisor can offer assistance in these matters. If you work with a financial advisor, they can change the beneficiary designations on your accounts to reflect your preferences. You can usually change the beneficiary immediately online if you administer the account, such as an online brokerage account.
Once you’ve decided who will get your estate, it’s crucial to examine the designations periodically. Significant life changes, such as divorce, birth, or death, may cause you to change your beneficiary preferences. You wouldn’t want your hard-earned assets going to someone you no longer care for.
Furthermore, you must ensure that any wording in your will does not contradict beneficiary designations. Your name will usually have less weight than beneficiary designations.
Things to Know Before Choosing a Beneficiary
Here are some points you should keep in mind when choosing a beneficiary:
- Always keep your beneficiaries up-to-date
- Be specific about who should get the monetary benefits on your death
- Don’t designate a minor as a beneficiary. This might lead to the appointment of a guardian who, in turn, may benefit more from the policy than the minor
- Be aware of the rules and regulations
- Do not disqualify any beneficiary unnecessarily from any policies
Final Word
Adding a beneficiary also helps your loved ones maintain their financial security. Protecting your assets in case of your death by allowing a beneficiary to get access is the best way to pass on your hard-earned money. Prioritise choosing beneficiaries for your financial accounts and ensure that your property is distributed appropriately by naming beneficiaries.
FAQs
Ans: A beneficiary is a person designated to receive the benefits and funds of your account, estate, or policies in the event of your death.
Ans: Beneficiaries are named for bank accounts, life insurance, retirement accounts, and significant assets. A beneficiary is someone you want to get your money from when you have passed away.
Ans: Beneficiaries are people or other legal entities that receive money or other benefits from benefactors. The beneficiary of a life insurance policy, for instance, is the person who gets the insurance proceeds after the insured person’s death.
Ans: The bank account will be frozen if it is solely titled in the deceased’s name. The family will not be able to access the account until probate has been completed.
Ans: Suppose you fail to name a beneficiary or beneficiaries. In that case, the decision about what happens to your money will be made by someone else, such as your financial institution or the state court where you lived. If there isn’t a designated beneficiary, your estate receives the proceeds of your life insurance policy.
The life insurance proceeds are divided appropriately, along with the rest of your assets. Your estate could need to go through probate, which often carries high costs and could delay the beneficiary’s inheritance for a long time.
Disclaimer
This article is solely for educational purposes. Navi doesn't take any responsibility for the information or claims made in the blog.
