Primary vs. Contingent Beneficiary: What’s the Difference?

Updated

For most people buying life insurance, the person you want to receive the death benefit when you die usually comes to mind pretty quickly. But then the “what-ifs” start creeping in. “What if they die before me?” “What if I change my mind?” “What if they can’t be located?” These are all excellent questions, and we’ll answer them in this article.

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You may have read or heard about people being sued because of a disagreement over who is legally a policy’s beneficiary. It makes for exciting reading, but it also drives home the point that naming a beneficiary needs to be done correctly to prevent any complications.

Let’s take a deep dive into the world of life insurance beneficiaries so you can rest assured that your loved ones will receive the life insurance benefit you intended for them.

Overview: Primary vs. Contingent Beneficiary

One good way to remember what a primary beneficiary of a life insurance policy is and what a contingent beneficiary is is by thinking of waiting in line for something you really want, like ice cream or water on a hot day: it’s always better to be first than it is to be second, especially when there’s only one cone left.

A primary beneficiary is “first in line.” When the insured person on a life insurance policy dies and a death claim is filed and approved, the primary beneficiary receives the full death benefit unless more than one primary beneficiary is named in the policy. In that case, all primary beneficiaries would split the death benefit equally unless the policy owner specified differently.

For example, if John has one sister, Mary, and she is the only named beneficiary, she will receive the entire death benefit when John dies. However, if John also wants his brother Jim to receive half of the death benefit, he would name both Mary and John as primary beneficiaries.

A contingent beneficiary, also known as a secondary beneficiary, is “second in line” to receive the death benefit. If the primary beneficiary pre-deceases the insured and the policy owner doesn’t name a new primary beneficiary, the contingent beneficiary will receive the death benefit. As can be done with the primary beneficiary, multiple contingent beneficiaries may be named in the policy.

For example, Sally buys a $100,000 life insurance policy and names her husband Chris as the primary beneficiary and their children Ruth and Stacy as contingent beneficiaries. If Sally dies before Chris, Chris will receive the full $100,000. If Chris dies before Sally and a new primary beneficiary isn’t named, Ruth and Stacy will each receive $50,000.

Choosing Beneficiaries

You can choose just about anyone you want to be a beneficiary of your life insurance policy, primary or contingent, with two exceptions. First, you can’t name a minor as the beneficiary. They must have reached the age of majority, 18 or 21, which will vary based upon what state they reside in.

If you insist on naming a minor as the beneficiary, the issue could be settled in probate court, which can be costly and delay the payout of the death benefit. Also, probate is a matter of public record so that anyone can see the disposition of your policy.

Second, they can’t be your pet. If you want to leave Scruffy some money (actually, the trustee of the “pet trust”) so he can still have his favorite dog food, you’ll have to do it through a will or trust, not your life insurance policy.

Beneficiaries don’t need to be people, though. You can name a nonprofit organization or your favorite charity as a primary or contingent beneficiary. You’ll want to consult with an accountant before you do that and find out the tax implications.

The last thing you want to do is name your estate as the beneficiary. If you do, the death benefit of your life insurance policy will go through the probate process, and it will become a long, drawn-out affair before anyone receives any money from the life insurance company. 

In addition, the state you reside in could ultimately end up receiving the death benefit. You can avoid that by naming a “remote contingent beneficiary,” who is a person or entity who would receive the proceeds should neither your primary nor contingent beneficiaries outlive you.

When choosing a beneficiary, you should also take into account who’s responsible for funeral costs if you want them to be able to pay for a funeral with life insurance. Like everything else, the cost of a funeral continues to increase and can easily exceed $10,000.

Changing Beneficiaries

Beneficiaries of a life insurance policy have no legal rights to your policy while you’re alive, and they may not even know they’ve been named as beneficiaries. You have complete freedom to change beneficiaries as you see fit, with one exception: if the policy is the property of an “irrevocable life insurance trust (ILIT).”

Why would anyone put themselves in a position where they couldn’t change their policy’s beneficiaries? The answer: tax advantages and protection from divorce, creditors, and legal action against you and your beneficiaries. An ILIT also avoids probate expenses and maintains everyone’s privacy.

A good time to review your designated primary and secondary beneficiaries is when you or your loved ones experience a major life event:

  • Birth 
  • Marriage
  • Divorce
  • Death

But remember, you don’t have to have a reason or explain why you want to change beneficiaries; it’s your right as a policy owner.


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Payouts: Primary vs. Contingent Beneficiary

The whole point of buying a life insurance policy is to leave money behind to someone for their benefit. It can be your spouse, children, college fraternity...anyone you’d like to receive a check from the life insurance company when you die.

The primary beneficiary always gets paid. A contingent beneficiary doesn’t receive any money from the insurer if the primary beneficiary is still alive and can be located. There can be multiple primary beneficiaries; for example, a father with ten children could name every child as a primary beneficiary and each would receive ten percent of the death benefit.

The contingent beneficiary receives a payout if the primary beneficiary has passed away before the life insurance company writes them a check. If you’re the policy owner and your primary beneficiary dies before you do, you can either name a new primary beneficiary or move your contingent beneficiary up to primary and name a new contingent beneficiary. 

7 Costly Mistakes People Make When Naming Beneficiaries

Naming a beneficiary needs to be done by the letter of the law, or the life insurance company will be paying out the money to someone you hadn’t intended to get it, or they’ll be keeping it in their coffers and not paying anyone because of legal battles that can take years to settle.

These are seven common mistakes people make concerning beneficiaries of their life insurance policy:

1. Thinking their will supersedes their life insurance policy. Regardless of what the will says, the beneficiaries named in the life insurance policy will receive the death benefit. Many former spouses have received a life insurance benefit intended for a current spouse because the beneficiary was changed in the will, but not on the policy itself.

2. Failing to list contingent beneficiaries. When you fail to list a contingent beneficiary and only name a primary beneficiary, if the primary dies before you do, it’s the same as if you named no beneficiary. As a result, it can take years for the courts to decide who, if anyone, is going to get paid.

3. Lack of specifics. You can’t just name “my children” as your beneficiary. It can get very ugly when there is a blended family situation or someone shows up out of the blue and claims to be a child you never knew about. List the exact legal name of everyone you want to receive any death benefit when you die. 

4. Naming minors as beneficiaries. Many adults name their spouse as the primary beneficiary and their minor children as contingent beneficiaries. If both parents die together and the children haven’t reached the age of majority, the estate goes into probate. Probate is an expensive, lengthy, and cumbersome process, and when it’s over, the person who ends up with the death benefit might be someone you didn’t prefer.

5. Not considering the emotional or financial readiness of beneficiaries. When you die, it’s just a matter of weeks before your beneficiary receives the death benefit. Some beneficiaries just aren’t emotionally ready to make decisions about a lump sum of money they’ve just received, or they lack the financial knowledge or discipline to handle the money. In either case, consider naming a trust as your beneficiary. A trustee will be appointed to oversee the distribution of the death benefit as you’ve directed them to do.

6. Not knowing state laws. Typically, community property states require that your spouse sign a waiver if you want to name someone else as your beneficiary. If you live in one of these states, consult with a financial planner or estate planning attorney who will be able to help you address this issue.

7. Not knowing your options. Many people aren’t aware that they have more options than just naming their spouse and children as beneficiaries. You have choices and can designate any one or more of these as beneficiaries:

  • One person
  • Two or more people (you decide how the benefit will be divvied up)
  • The trustee of a trust you’ve established
  • A non-profit or charity
  • Your estate (not advisable)

Get Competent Advice When Naming Beneficiaries

The best way to avoid making any of these potentially costly mistakes: work with a professional life insurance agent, financial planner, CPA, or estate planning attorney. Many high-net-worth individuals use a team approach when they buy life insurance and involve two or more of these advisors to ensure that all legal requirements are met, and distribution of the death benefit will go smoothly when they pass away.

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