What Is a Primary Beneficiary?
A primary beneficiary is an individual or organization who is first in line to receive benefits in a will, trust, retirement account, life insurance policy, or annuity upon the account or trust holder's death. An individual can name multiple primary beneficiaries and stipulate how distributions would be allocated.
For example, a parent with a $100,000 life insurance policy can name their son and daughter as the primary beneficiaries. However, the account holder is free to decide how to distribute the assets which means the daughter can receive $60,000 and the son can get $40,000 upon the policy holder's death. Each can also receive equal 50% portions of $50,000 should the parent make that clear in the insurance policy.
Primary Beneficiary Explained
A primary beneficiary is different from a contingent beneficiary, who is second in line to receive benefits. The contingent beneficiary receives an inheritance if they outlive the primary beneficiary. The contingent beneficiary can also receive benefits if the primary beneficiary refuses the inheritance or can't be located.
Regardless, both primary and contingent beneficiaries must be legally competent to accept the gift. If a person dies while their named beneficiaries are still children, a court may appoint a legal guardian to manage the inheritance until the child reaches an age of maturity as defined by state law. In the case of a will or trust, an individual can set specific rules as to how distributions are made toward beneficiaries. For example, the trust creator or grantor can stipulate that their children as named beneficiaries can acquire control of the trust's assets and income only after they graduate college or marry.
The Importance of Updating Primary Beneficiaries
Named beneficiaries of insurance policies and accounts like 401(k)s and Individual Retirement Accounts (IRA)s take stance over those designated in a will. This means assets in these accounts will flow to the named beneficiary in the account policy even if a will suggests otherwise.
An IRA can name a spouse as the primary beneficiary, while the same person's will may name the children as primary beneficiaries. The spouse will receive the proceeds of the IRA and the children will receive the assets for which they are named primary beneficiaries in the will—but nothing from the IRA.
Except for an irrevocable trust, most entities that transfer wealth can be updated by changing primary and contingent beneficiaries.
And even though naming primary and contingent beneficiaries is often optional for accounts like IRAs, naming them can help assets bypass the often costly process of probate that an individual's heirs may go through to secure their benefits. Failure to name beneficiaries may also mean assets fail to keep generating returns or income. For example, several retirement accounts allow spousal beneficiaries to roll over their partner's retirement assets into their own IRAs and delay making required minimum distributions (RMD) until after they turn 70. Non-spousal beneficiaries are typically required to start taking RMDs as soon as the original account holder dies, which means these assets won't benefit from compound interest and tax-deferred growth.