Contingent Beneficiaries, Why Do I Need One For My Life Insurance Policy?


While you may not be able to take your assets with you once you die you do have the capability of creating an estate plan to leave your assets with your family and loved ones using a life insurance policy, trust, will, or other legal entity.   In the case of a life insurance policy, you will be required to name a primary but not contingent beneficiary.

So, what is a contingent beneficiary and how does it differ from a primary beneficiary?

Primary Versus Contingent Beneficiary

First, let’s define what a beneficiary is.  By definition, a beneficiary is a named individual who will inherit any assets you leave behind as described in your life insurance policy, trust, will, annuity, or retirement plan.  Charities may also be named as a beneficiary provided that they have the legal ability to accept your endowment.  For instance, money cannot be left directly to say, your pet because a pet doesn’t have the legal ability to accept monetary funds.  This is also  the case for a legally incompetent adult or minor child.  For this matter, a court can designate a custodian or guardian to manage the estate on behalf of the primary beneficiary until they are old enough to manage it themselves.

What Is a Primary Beneficiary?

The primary beneficiary is the person or entity that you designate to inherit your assets once you pass away.  Additionally, you have the ability to designate more than one primary beneficiary for your assets.  If you decide on more than one named beneficiary, those beneficiaries will split your assets once you pass.

What Is a Contingent Beneficiary?

Quite simply, the contingent beneficiary is the individual, trust, or estate that receives your assets if your named beneficiary is unable to receive the assets for the above mentioned reasons.  Oftentimes, the contingent beneficiary inherits the assets if the primary beneficiary is unable to be located, if they pass before you do, or if they refuse the inheritance.  Think of them as next in line for your inheritance if your primary beneficiary is unable or unwilling to accept your gift.

Attorneys commonly recommend that their clients assign at least one contingent beneficiary when devising a will.  It is also possible to name several contingent beneficiaries, while listing them in a particularized order.

Upon your death, your assets will typically go through the legal process, known as probate.  However, if a primary and contingent beneficiary is named, the probate process can be bypassed, while your assets are passed to your heirs more efficiently.  During probate, a deceased individual’s estate is distributed to creditors for any remaining debts and the designated beneficiaries.  Generally speaking, the probate property is dispersed according to your last will and testament, or according to your state’s law if you do not have a will.

Reasons To Have a Contingent Beneficiary

When it comes to wills, beneficiaries take precedence.  Contingent beneficiaries can be assigned to life insurance policies, retirement plans, and annuities.  Typically, the spouse or partner is assigned as the primary beneficiary of your policy.  They will receive any proceeds from the policy at the time of your death.  In the event that the primary beneficiary is unable to receive your proceeds, then the contingent beneficiary will be the next in line.

Selecting a contingent beneficiary for wills and life insurance policies is way to ensure that your surviving loved ones are taken care of if the primary beneficiary is unable to do so.  This is also a great way to donate your proceeds to a charity of your choice after your death.  This type of distribution allows for an uncomplicated process in the event of the death of your named primary beneficiary.

How To Choose a Contingent Beneficiary

Many families decide to designate their child, children, or a legal guardian representing your children as the contingent beneficiary, while choosing their spouse as the primary beneficiary.  If you have more than one child, you can allot a specified percentage of your benefits to each child.  If you do not have any children, then you may want to designate a close family member or friend.

As mentioned previously, you can also name a charitable organization as your beneficiary, but you’ll want to speak to a financial professional regarding setting that up.

Common Beneficiary Mistakes and Misconceptions

Often, policyholders designate a minor child as the beneficiary.  If this is the case, a custodian will need to be named as well.  A common misconception is that the contingent beneficiary will automatically receive the inheritance once the primary beneficiary passes away, however, this isn’t necessarily true.  In the event that the primary beneficiary dies after the policyholder, the proceeds are actually paid to the primary beneficiary’s estate due to the fact that they were alive at the time of the policyholder’s death.  While this is not an absolute in all cases, it does need to be considered.

Consequences To Not Electing Beneficiaries

If a policyholder selects their spouse as the sole beneficiary, without selecting a contingent beneficiary, the life insurance proceeds may be subject to substantial estate taxes.  If both the insured and sole beneficiary die at the same time, such as in a car accident, the proceeds will be passed on to the estate while incurring a large amount of superfluous taxes.

If you fail to name a beneficiary, loved ones or family members could lose large sums of money due to the taxes imposed on the policy proceeds.  Additionally, without a named beneficiary the insurance company is left to decide who the proceeds goes to, and depending on your family circumstances, this could potentially cause many delays and issues.

As both a control device and safety feature, the contingent beneficiary is the most efficient way to control the dispersion of your wealth.

Review Beneficiaries Often

As long as you’re alive, your beneficiaries have no rights to your assets, so you have the ability to change the beneficiary designation as often as you like and at any time.  Upon marriage or divorce, it will be important to review who you’ve assigned as beneficiary for your bank accounts, retirement accounts, life insurance policies, and any other financial assets.  In the event of marriage, the birth of a child or children, or divorce, it’s always a wise decision to draft a new will, otherwise your state’s laws may change or invalidate your beneficiary designation(s).

As we all know, relationships change, people move, or pass away.  It’s always a good idea to re-evaluate your beneficiary(s) at least once a year.  You have the ability, as the policyholder, to add, change, or remove beneficiaries as you see fit.  If you don’t currently have a contingent beneficiary, consider adding one to your policy.  You can never have too much peace of mind.

If you feel it is time that you review your life insurance policy with a professional agency, Ogletree Financial can be reached at 1-800-712-8519.


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