What Is a Contingent Beneficiary?
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Contingent beneficiaries are the people who receive your death benefit if your primary beneficiaries die or become impaired and are unable to claim their benefits. It's important to name a backup, because if your primary beneficiaries don't take your death benefit, the money will end up as part of your estate and be distributed by an executor after your death.
Who can I name as a beneficiary?
When you purchase a life insurance policy, you'll be asked to assign beneficiaries. Your beneficiaries are the people or entities who receive the payout, or death benefit, if you pass away during the coverage period. Some common choices for beneficiaries include:
- Your spouse
- Your family members
- Your adult children
- A trust
- Your company
- A charity
- An estate
Beneficiaries must have the legal power to claim an asset. For example, pets and minor children can't be beneficiaries. If you want to leave money to young children, you will need to assign a guardian or set up a trust to oversee the funds until the child comes of age.
Most of the time, unless the beneficiary assignment is considered irrevocable under your policy, you can change your beneficiaries. Experts recommend reviewing your selections every three to five years and after any significant life event, such as a divorce, death or birth in your immediate family.
Primary and contingent beneficiaries
Primary beneficiaries are the people or entities you intend to receive your life insurance death benefit. Contingent beneficiaries are the backup. For example, if your spouse is your sole primary beneficiary and you both die in a car crash, your contingent beneficiaries would be able to claim the death benefit. Similarly, you can also assign tertiary beneficiaries, who would be able to claim your death benefit if all of your primary and contingent beneficiaries were to pass away before you or at the same time as you.
You can assign as many primary and contingent beneficiaries as you want. The total percentage of life insurance proceeds assigned to each of the primary beneficiaries needs to total 100%, which is the case with contingent beneficiaries as well.
To illustrate, say you are married, have three children, and have a financially dependent brother. You could assign the following beneficiary structure for your $600,000 death benefit:
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% |
If you share a death benefit, some variables can have an impact on the disbursement of the funds. For 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.
As you can see, the only real difference between primary and contingent beneficiaries is that primary beneficiaries have the first claim to your life insurance proceeds.
Contingent beneficiaries can also assist primary beneficiaries if your primary beneficiary isn't legally able to claim or manage the money. For example, if your spouse is your primary beneficiary but is somehow incapacitated, and your adult child is a contingent beneficiary, your child could claim the death benefit on the condition that they assist in the care of 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 of the paperwork. Typically, this will involve providing each beneficiary's full name and social security number (or tax ID number in the case of an organization). Adding all of the pertinent information is essential, to prevent your family from facing hurdles when trying to claim your life insurance benefits. Do not merely write "child" or "spouse" when filling out your forms, as this could lead to confusion if your life circumstances change down the line.
Give every beneficiary a copy of your life insurance, and make sure they know how to contact each other and your life insurance company in the event of your death. To collect death benefits, all beneficiaries are required to submit the death certificate to the life insurance company.
Why to have a contingent beneficiary
While your will determines the distribution of assets within your estate, life insurance bypasses this procedure, and the funds are given directly to your beneficiaries. However, if you don't list a life insurance beneficiary, or none are able to claim the death benefit, the money will have to go through probate as part of your estate.
This process, depending on your estate size and complexity, can take several months. The probate process is extensive because, it involves using your estate to pay off creditors. If you had no debts, then the probate court would determine who should receive the remaining assets. If you didn’t name beneficiaries, any remaining money could be fought over or used in a way you didn't intend.
Suppose you don't have any specific person in mind, or your spouse is your primary beneficiary, but you don't have children. In that case, you could simply assign a favorite charity as your contingent or tertiary beneficiary to keep the funds out of probate court.
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