What Is a Contingent Beneficiary?
Contingent beneficiaries receive your death benefit if your primary beneficiaries die or become incapacitated and are unable to claim their benefits. It is critical to name them because if your primary beneficiaries do not claim your death benefit, the money will become part of your estate and will be probated after your death.
Who can I name as a beneficiary?
When you get life insurance, you'll be asked to name beneficiaries. Your beneficiaries are the people or entities who will receive the payout or death benefit if you die while you are covered. Beneficiaries frequently select from the following options:
- Your spouse
- Family members
- Adult children
- A trust
- Your organization
- A charity
- An estate
Beneficiaries must be legally capable of claiming an asset. Pets, for example, are not eligible, nor are tiny children. If you want to leave money to young children, you must appoint a guardian or establish a trust to administer the funds until the child reaches the age of majority.
You can usually modify your beneficiaries unless the beneficiary assignment is considered irrevocable under your insurance. Experts advise evaluating your choices every three to five years, as well as following any important life event, such as a divorce, death, or birth in your immediate family.
Primary and contingent beneficiaries
The persons or entities you want to receive your life insurance death benefit if everything goes as planned are known as primary beneficiaries. The backup is contingent beneficiaries. For example, if your spouse was your single primary beneficiary and both of you perished in a vehicle accident, your contingent beneficiaries might claim the death benefit. Similarly, you can name tertiary beneficiaries who will be entitled to collect your death benefit if all of your primary and contingent beneficiaries die.
You can name as many beneficiaries as you wish for both primary and contingent beneficiaries. The overall percentage of life insurance proceeds assigned to each of the primary beneficiaries must simply equal 100%, as does the percentage awarded to contingent beneficiaries.
Assume you are married with three children and a financially dependent brother. For your $600,000 death benefit, you may designate the following beneficiary structure:
Person | Relationship | Beneficiary Level | % of Death Benefit |
Laura | Spouse | Primary | 50% |
James | Brother | Primary | 50% |
Ann | Child | Contingent | 50% |
Lee | Child | Contingent | 25% |
Rob | Child | Contingent | 25% |
When you divide and split a death benefit, various factors can influence how the monies are distributed. As an example:
- Only you pass away - Laura and James would each receive $300,000.
- You and Laura pass away - James would receive the full $600,000 death benefit.
- You, Laura and James pass away - Ann could claim $300,000 of the death benefit. Lee and Rob would each receive $150,000.
- You, Laura, James and Rob pass away - Ann would get $400,000 of the death benefit while Lee would get $200,000.
The only significant distinction between primary and contingent beneficiaries, as you can see, is that primary beneficiaries have first claim to your life insurance proceeds.
If your primary beneficiary is not legally capable of claiming or managing the money, contingent beneficiaries can help. For example, if your spouse was your primary beneficiary but became incapacitated, and your adult kid was a secondary beneficiary, they might access the proceeds as long as they helped care for your spouse.
How to assign and assist your contingent beneficiaries
When you assign contingent beneficiaries for your life insurance policy, make sure they are specified clearly in all paperwork. Typically, this will entail providing each beneficiary's full name and social security number (or, in the case of an entity, a tax ID number). Including all relevant information is critical to avoiding complications for your family when attempting to claim your life insurance payments. When filling out documents, do not simply put "child" or "spouse," as this may cause misunderstanding if your personal circumstances change in the future.
Give a copy of your life insurance to each beneficiary and make sure they know how to contact each other and your life insurance company in the event of your death. All beneficiaries must submit death certificates to the life insurance company in order to obtain death benefits.
Why have a contingent beneficiary?
While your will directs the distribution of assets in your estate, life insurance benefits avoid this step and are distributed straight to your beneficiaries. However, if you do not name a life insurance beneficiary, or if all of them are unable to collect the death benefit, the money becomes part of your estate and must be probated as part of your estate.
Depending on the size and complexity of your estate, this process could take several months. The probate process is lengthy because it entails the use of your estate to repay creditors. If you have no debts, the probate court will decide who gets your remaining assets. If you do not specify beneficiaries, any residual funds may be battled over or used in ways you did not intend.
Assume you don't have anyone in mind, or your spouse is your major beneficiary, but you don't have any children. To keep the funds out of probate court, just name a favorite charity as your contingent or tertiary beneficiary.