What’s a Contingent Beneficiary for Life Insurance?

Updated

It usually isn’t very difficult to name a primary beneficiary when you’re applying for a life insurance policy. For a couple, it’s most often the spouse or partner. For a single person, parents are often named as the beneficiaries. For a business partner with a buy-sell agreement, their business partner is named the beneficiary. Not too complicated, right?

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It can get a little trickier when it comes to naming a contingent, or backup, beneficiary. For a couple with no children, which spouse’s parents get the death benefit? Both? Or for a single adult with no children whose parents are deceased, should it be a sibling or a charity? Not easy decisions for these people.

This article will focus on contingent beneficiaries: what they are, who should be one, if one is needed, what happens if you don’t have one, and more. Let’s start with defining what a contingent beneficiary is.

What’s a Contingent Beneficiary for Life Insurance? 

A contingent beneficiary is a person, organization, or entity that receives your life insurance policy’s death benefit if your primary beneficiary dies. Sometimes relationships change, which is why life insurance companies encourage you to name at least one contingent beneficiary in your policy. 

Your contingent beneficiary receives your life insurance payout if your primary beneficiary is unable to collect it. By naming a contingent beneficiary, you save the payout from being delayed by a lengthy legal process, like probate, or being taken by your creditors. You can also name more than one contingent beneficiary. If you do so, each of them receives a percentage of your death benefit.

If you don’t name a contingent beneficiary and your primary beneficiary can’t claim the payout, the insurer will pay the benefit to your estate. Once it becomes part of your estate, it’s subject to probate and estate taxes. With probate, a judge decides who will get the payout; this can take months and will reduce the amount of the payout your loved ones receive.

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What’s the Difference Between a Primary, Secondary, or Contingent Beneficiary?

The concept of a primary beneficiary is pretty straightforward: it’s the first person in line to receive your life insurance policy’s death benefit. In the case of a married couple, it’s the spouse; if it’s a single parent, it’s the children or the person who will be the kids' legal guardian if they’re minors.

The contingent beneficiary is second in line to receive the death benefit. A contingent beneficiary is named if the primary beneficiary is unable to receive the death benefit. In most cases, the secondary gets the death benefit when the primary beneficiary has predeceased the insured or the relationship has changed, as with a divorce.

A secondary beneficiary is the same thing as a contingent beneficiary. When telling someone that they’re not the primary beneficiary but are named on the policy to receive the death benefit if the primary can’t accept the proceeds, it's preferable to call them the contingent beneficiary and not the secondary beneficiary. Nobody likes to come in second.

There’s one other type of beneficiary seldom referred to: a tertiary beneficiary. This type of beneficiary only receives the death benefit if all of the primary and contingent beneficiaries are deceased or they’re unqualified to receive the benefits.

How Does a Contingent Beneficiary Work?

When you apply for a life insurance policy, it will be very clear on the application that you name the person you’d like to be your contingent beneficiary. Just like you will for the primary beneficiary, you’ll need their:

  • Full name
  • Social Security number
  • Contact information

Some applications also have a space for multiple tiers of beneficiaries, which is often used when there’s more than one child in a family, or there are several partners in a business.

It’s essential to keep both your primary and contingent beneficiaries updated throughout the term of the policy. Now may be a good time for you to get out your policy and verify who your beneficiaries are. Marriage, death of a loved one, childbirth, or divorce are good reasons to review your beneficiaries. Contact your agent or insurance company and request a change of beneficiary designation form if needed. 

Who Should Be a Contingent Beneficiary for a Life Insurance Policy? 

Anyone with what’s called an “insurable interest” can be named as a primary or contingent beneficiary on your policy. If there is an insurable interest, it means that the beneficiary would suffer an economic loss when you pass away.

Secondary beneficiaries often include:

  • Your spouse
  • Other relatives
  • Non-relatives
  • An organization or charity
  • A trust
  • Your children (with caveats)

Choose a contingent beneficiary who depends on you for financial support or someone who would support your family if you die. Most people choose the guardian of their children or a close family member.

An attorney or financial advisor can help when you name a minor child as a contingent beneficiary on your life insurance policy. If your contingent beneficiary hasn’t yet reached the age of majority, you’ll need to designate a legal custodian to receive the death benefit or create a trust for the child to receive the death benefit when they’re no longer a minor and you feel that they can make responsible financial decisions.

Frequently Asked Questions: Contingent Beneficiaries for Life Insurance

We’ve touched on the basics of contingent beneficiaries, but you might be surprised at how many questions people have about making this important decision. Here are some of the most frequently asked questions.

Can a child be a contingent beneficiary?

Yes, your child can be named a contingent beneficiary of a life insurance policy, but that doesn’t mean it’s necessarily a good idea. It’s not easy for children to receive the death benefit if they’re still a minor. Life insurance companies are prohibited from paying a death benefit directly to anyone who’s not reached the age of 18, except for Alabama and Nebraska, where it’s age 19. 

If your child is under the age of majority when you die, the policy's proceeds will be given to a custodian of the funds. The courts can appoint this guardian, but the court usually chooses the surviving parent. You must specify in your policy that you don’t want the surviving parent to be the custodian. The custodian will place the death benefit into a custodial account, such as a Uniform Transfers to Minors Account (UTMA) or a life insurance trust.

Do you need a contingent beneficiary?

It’s not legally required that you name a contingent beneficiary, but it is strongly recommended by estate planning attorneys, life insurance agents, and life insurance companies. There are a couple of key reasons why this is the case.

First, beneficiaries take precedence over wills. A beneficiary of a life insurance policy has the right to the proceeds from the policy even if the will states that the death benefit should go to someone else.

Second, naming a contingent beneficiary is a great way to donate to a charity or particular cause after the insured's death. For example, if the insured leaves the death benefit to a spouse as a primary beneficiary, and the spouse isn’t capable of managing the proceeds, they can be given to a charity, or the children.

What happens if you don’t have a contingent beneficiary for a life insurance policy?

If you don’t name a contingent beneficiary, the death benefit could be subject to substantial estate taxes. If the insured individual outlives their spouse by a few days after a car accident, for example, the proceeds would pass to the estate if there wasn’t a contingent beneficiary, possibly exposing the estate to unnecessary taxes.

Also, if you don’t name a contingent beneficiary, your surviving loved ones may lose thousands of dollars because of the taxes levied on your estate. It’s easy to name a contingent beneficiary to prevent this from happening.

Lastly, by not naming a contingent beneficiary, your loved ones may struggle to get the money you intended for them to have. The life insurance company will have to determine who the money should go to, which can cause a lot of delays and difficulties depending upon your family situation.

What if you have multiple primary beneficiaries and one dies?

Life insurance policies default to what is called a “per capita” death benefit, meaning that if you have more than one primary beneficiary and one dies, the insurance company will split the deceased person’s portion of the death benefit between the primary beneficiaries.

For example, if you name your three sisters as your primary beneficiaries, each would receive 33% of the death benefit when you die. If one of your sisters were to die before you, your other two sisters would each receive 50% of the death benefit when you die, unless you update your beneficiary designations. 

It’s important to know that contingent beneficiaries will never receive any part of the death benefit unless all of the primary beneficiaries have passed away.

What if the primary beneficiary can’t be found?

If the primary beneficiary can’t be located when the time comes for the life insurance company to make the payout, your contingent beneficiary will receive the death benefit if you’ve named one. This is a good reason that it’s important to select both a primary and a contingent beneficiary and periodically review and update the beneficiaries.

What if you need to change your contingent beneficiary?

Sometimes major life events, like a marriage, divorce, or death in the family, will necessitate a change in your beneficiaries. It’s usually easy to do this. Contact your insurance agent or life insurance company, and they can provide you with a change of beneficiary form to complete. Many companies also have an online portal where you can find and complete this form digitally.

Always Name a Contingent Beneficiary

Life insurance is one of the most important investments you’ll ever make for your loved ones. Naming a contingent beneficiary is a safety feature to protect this investment. It’s the most practical way for you to control the future distribution of your wealth. It’s easy to do, but it’s an important decision that shouldn’t be taken lightly. Invest some time and make the best decision on who your contingent beneficiary should be.

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