What Is a Contingent Beneficiary?

Eric Van Haaften Estate Planning with Life Insurance

When setting up a life insurance policy, it is necessary to select a beneficiary to receive the proceeds upon your death.

Many clients have questions about the role of a primary beneficiary and how it differs from the privileges of a contingent beneficiary.

Ensure peace of mind by designating primary and contingent beneficiaries, ensuring your loved ones are cared for according to your wishes.

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What is a primary beneficiary in life insurance?
What is a contingent beneficiary in life insurance?
How do you select your beneficiary?
How can I change my life insurance policy beneficiaries?
FAQ: Life Insurance Beneficiary Rules

Primary Beneficiary vs Contingent Beneficiary

Understanding the importance of naming both primary and secondary beneficiaries for your life insurance policy is required for effective estate planning.

It’s not just a simple task but rather a necessary decision that can determine how quickly your loved ones receive support in difficult times or if they must go through lengthy probate court proceedings.

By designating someone who can step up when needed, whether they are family members or trusts, you ensure that there is a safety net in place for any unforeseen circumstances.

What is a Primary Beneficiary?

A primary beneficiary is the initial recipient of benefits from a trust, life insurance policy, or investment account upon the owner’s death.

You can name more than one person as your primary beneficiary and specify a percentage of the account each beneficiary will receive upon your death.

What if you have multiple primary beneficiaries, and one dies?

Life insurance contracts have a per capita process to divide the death benefit equally among the primary living beneficiaries named in the policy.

If you have several primary beneficiaries and one suddenly dies, the insurance company will evenly split the death benefit between the remaining primary beneficiaries.

What is a Contingent Beneficiary?

A contingent beneficiary, also known as a secondary beneficiary, only comes into play when all the named primary beneficiaries have died before the owner or cannot be located.

While not required, it is advisable to designate contingent beneficiaries in your estate plan. This ensures that unexpected events affecting primary beneficiaries do not leave your plan incomplete or vulnerable.

You can also name more than one person as a contingent beneficiary and specify a percentage of the account each beneficiary will receive upon your death.

Life Insurance Contingent Beneficiary

When the primary beneficiary cannot receive the death benefit, it can create confusion, legal disputes, and delays in distributing the proceeds from your life insurance policy.

Forgetting to designate a contingent or a tertiary beneficiary on your life insurance policy can create unwanted problems for your loved ones.

Here are some real-life scenarios where this oversight can cause difficulties for your heirs.

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Simultaneously Death

What happens if you and your primary beneficiary die simultaneously by getting killed in a car accident or natural disaster?

Even though simultaneous death is rare, many states have adopted a little-known law known as the Uniform Simultaneous Death Act.

If there is no clear evidence of who died first between you and your beneficiary, your life insurance policy is allocated as though you outlived your named beneficiary.

This act is important because the death benefits would go to your estate, not your beneficiary’s estate, according to Finweb.

Yet, if contingent beneficiaries are designated in your insurance contract, the death benefits would go to them.

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What happens if there is no contingent beneficiary?

If the primary beneficiary has died without a contingent beneficiary, the policy goes into your estate through probate.

Life insurance proceeds could also be subject to estate taxes if the policyholder names the spouse as the sole beneficiary and no contingent beneficiary.

If the insured outlives their spouse by a few days if they are both in a car accident, the proceeds will pass to the estate, incurring unnecessary taxes.

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tertiary beneficiaries

Many life insurance policy owners often forget to name a tertiary beneficiary.

A tertiary beneficiary is assigned to receive the benefits of a life insurance policy when the primary and contingent beneficiaries have passed away.

Tertiary beneficiaries are named to ensure that benefits are distributed according to the owner’s wishes and to avoid probate.

Who Should Be My Beneficiary?

As you can see, by designating primary and contingent beneficiaries, you can bypass probate, save money, and maintain privacy regarding your affairs.

This ensures a smooth transfer of assets without any legal complications or surprises during difficult times.

Since beneficiaries take precedence over wills, your named beneficiary has the rights to your account after the owner’s death, even when your will state otherwise.

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What are the three types of beneficiaries?

When determining the recipients of your policy proceeds, you can choose from three types of beneficiaries.

These individuals or entities can be designated primary or secondary beneficiaries, including your spouse, children, trust, business partner, company, or charitable organization.

Family Beneficiary: Usually, married people select their spouse as the primary beneficiary, with children as alternate beneficiaries if anything happens to the spouse. Sometimes, a trust is designated as the beneficiary to manage and distribute the funds.
Business Beneficiary: The death benefit recipients from a business insurance policy can include your company, business partner, family members, or a combination thereof. The specific beneficiary arrangement will depend on the type and intended purpose of the policy.
Charitable Beneficiary: If you don’t have any family members who rely on your financial support, you can name a charity as your beneficiary. This way, you can leave behind a meaningful contribution to an organization that is important to you.

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Who you should never name as a beneficiary?

According to WTOP News, you should avoid having minor children, disabled people, and your estate listed as your beneficiary.

If you accidentally do this, a probate court will appoint someone to look after the death benefits, which can be expensive.

A living trust could be an excellent way to distribute the benefits after the minor child is old enough to accept the money over several years or in a lump sum.

primary beneficiary vs contingent beneficiary

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Changing a Life Insurance Beneficiary

It is important to regularly review and update your beneficiary arrangements with an agent who understands how life insurance fits into your estate plan.

Various life events can occur within your family, such as marriages, births, divorces, or deaths, which may affect who you want to designate as your beneficiary.

Even after initially naming primary and secondary beneficiaries on a life insurance policy, circumstances may change over the years.

In most cases, you can modify named beneficiaries for accounts unless they are held in an Irrevocable Life Insurance Trust (ILIT).

Typically, changing beneficiaries on a life insurance policy or financial account requires completing and signing a change of beneficiary designation form provided by the respective institution.

If you need assistance understanding life insurance options or determining primary and contingent beneficiaries that align with your needs and goals, please get in touch with us.

FAQ: Life Insurance Beneficiary Rules

How does a beneficiary claim life insurance benefits? Start by obtaining a death certificate and then complete the insurer’s claim form meticulously. Once submitted, patiently await the insurer’s prompt review of your claim. You can expect to receive the benefits within a few weeks if all requirements are met.

Do life insurance companies contact beneficiaries? Life insurance companies do not reach out to beneficiaries due to a lack of contact information or knowledge about the policyholder’s demise. Hence, the beneficiaries must contact the life insurance company and file a claim.

Who do I put for beneficiary designation? A beneficiary designation is selecting a person to receive an asset upon the account owner’s death. This can include life insurance policies and retirement accounts. Once the account owner passes away, their assets are transferred to this beneficiary.

Can the same person be a primary and contingent beneficiary? To ensure a smooth transfer of assets, it is crucial to avoid naming the same individual as both primary and contingent beneficiaries. If the primary beneficiary passes away before you, having a backup will prevent the asset from going through probate.

Is it better to have a beneficiary or will? The designated beneficiary listed on the policy has the legal right to claim the payout, regardless of what is stated in your will. It is also recommended to name a contingent beneficiary in case your primary beneficiary cannot receive the payout.

A policy owner’s rights are limited under which beneficiary designation? When policy owners designate an irrevocable beneficiary, they cannot alter or remove the beneficiary without their consent. Additionally, the policy owner requires the beneficiary’s approval to exercise other ownership rights, such as surrendering the policy or taking a policy loan.