What Is a Contingent Beneficiary?
A beneficiary is the person who receives your life insurance benefits when you die. Your first pick for a beneficiary is called your primary beneficiary. However, you can also name contingent beneficiaries that are next in line if your primary beneficiary dies before you or cannot claim the payout for some other reason. It might help to consider a contingent beneficiary as an alternative or backup beneficiary.
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Why It’s Better to Have a Backup Beneficiary
A backup beneficiary ensures that your life insurance benefits are directed as you intend, even during a worst-case scenario.
Naming a primary beneficiary ensures your insurance payment goes to your loved ones. Your death benefits can help them pay for your final expenses and give them time to grieve without immediately worrying about replacing your income or paying bills.
However, consider what would happen if that primary beneficiary dies before or at the same time as you. For example, imagine you’re in a fatal car crash with your spouse. If your spouse was your primary beneficiary and you didn’t select a contingent beneficiary, your benefits are paid into your estate. Unless you have a very clear will, this usually means the state has to disperse the funds through probate court, which can be a long and expensive process. This could mean your children, siblings, or other dependents must go through a legal battle to access this money.
Understand Beneficiaries On a Life Insurance Policy
Life insurance policies require you to set a main primary beneficiary. This is the person (or people, if you choose to split up the death benefit) that receives a payout upon your death.
Some policies also let you set a contingent beneficiary. These beneficiaries don’t receive benefits unless your primary beneficiaries can’t accept the payout. If that happens, the contingency beneficiaries have the death benefits distributed according to your selected percentages.
How You Designate Beneficiaries
You can usually specify the percentage of your payout you want the primary beneficiaries to get. For example, you might give your spouse 50%, your first child 25%, and your second child 25% of your benefits. Whenever assigning multiple primary beneficiaries, you must ensure the total percentages assigned add up to 100%. You do the same with contingent beneficiaries.
When deciding between a primary vs. contingent beneficiary, many people choose close relatives to be their primary beneficiaries, like their spouse, children, or siblings. You might consider your parents, aunts, uncles, nieces, nephews, or friends as contingent beneficiaries in case the rest of your family isn’t available to receive the benefits. You could even choose a non-profit or charity as a contingent beneficiary.
Primary vs. Contingent Beneficiaries
Primary Beneficiary | Contingent Beneficiary | |
|---|---|---|
Designation | First name on beneficiary form | Second (or third, etc) name on beneficiary form |
Payout Receipt | First to receive death benefit | Will only receive death benefit if primary beneficiary cannot receive it or refuses it |
Timing of Payout | First to receive death benefit | May be delay in receiving payout as efforts to locate primary beneficiary are undertaken; will only receive death benefit if primary beneficiary cannot receive it or refuses it |
Control of Payout | Full control over death benefit payout | Full control over death benefit payout |
Taxing of Payout | Not taxed | Not taxed |
Primary beneficiaries are the people you want to receive your payout. They are the first names you put on the beneficiary form. The names of your contingent beneficiaries likely go beneath these names. Primary beneficiaries are the first in line for payouts and get 100% of it. Even if you split your benefits between four primary beneficiaries and three of them have died, the remaining primary beneficiary gets the full share of death benefits over any contingent beneficiaries.
The good news is that whether a primary or contingent beneficiary receives your payout, they don’t have to pay taxes on it, as it’s not considered income.However, there may be taxes if the death benefits enter your estate. They can also use the money as they wish, whether to pay off your debts or use it for themselves.
How Does Having a Contingent Beneficiary Work?
Because your contingent beneficiaries are backups, there’s no promise they get any money when you die. As long as one or more of your primary beneficiaries are alive and willing to accept the payout, the contingent beneficiaries don’t get anything. For them to get the payout, every one of your primary beneficiaries must have died or turned down the money. However, contingent beneficiaries can sometimes step in if a primary beneficiary is incapacitated, such as in the case of a coma or Alzheimer’s disease.
Even though there’s no promise your contingent beneficiaries will receive anything upon your death, you need to ensure the percentages you designate to each add up to 100%. Otherwise, this could make distribution tricky and slow down the process. You can change your contingent beneficiaries any time you wish, which is helpful if you have a falling out or one of your beneficiaries passes on.
See It In Action
To better understand how life insurance benefits work, imagine you have a policy, and your primary beneficiaries are your spouse (50%), child (25%), and brother (25%). Your cousin (50%) and nephew (50%) are contingency beneficiaries. Here are a few examples of when a contingency beneficiary would receive the death benefits:
- You die, and your primary beneficiaries are still alive. The contingent beneficiaries receive no death benefits.
- You die, and your brother is dead. Your spouse and child would split your brother’s share of your payment, so they’d get 62.5% and 37.5%, respectively. The contingent beneficiaries receive nothing.
- You die, and your spouse, child, and brother are also dead. The contingency beneficiaries get the payout and follow the 50/50 split you designated.
- You die, and your spouse, child, brother, and cousin are also dead. Your nephew gets the full payout as the remaining contingency beneficiary.
What to Consider When Picking a Contingent Beneficiary
Choosing your contingent beneficiary isn’t as simple as picking your favorite niece. Consider the following aspects before choosing who receives your death benefits:
- Does your state require you to name your spouse as a primary beneficiary? Some states, known as community property states, require you to list your spouse as the primary beneficiary for your life insurance policies. In these instances, you may be unable to make them contingent beneficiaries.
- Is the beneficiary an adult? Many states have laws prohibiting minors from receiving life insurance payouts. Naming a minor as your contingent beneficiary could create legal issues that delay or reduce the payout.
- Who is paying your final expenses? Whoever you choose as a contingent beneficiary must be trustworthy enough to pay for your funeral or remaining debts out of your death benefits if necessary.
- Who needs the money? If your remaining family members are well off, you might consider making a less affluent friend your contingent beneficiary instead.
Benefits of Designating a Contingent Beneficiary
When you name a contingent beneficiary, it can benefit your surviving loved ones in the following ways:
- Helps you avoid probate. Probate is when the courts decide how to split up your estate. When you don’t have any contingent beneficiaries, your death benefits enter probate. It’s usually a lengthy and expensive process, so your loved ones lose both time and money.
- Ensures there are no questions about your final wishes. An unexpected death can often cause familial strife. Clearly defined beneficiaries can ease tensions and ensure your final wishes are followed.
- Lets you give to your favorite charity. If none of your primary beneficiaries are still around, you may not have anyone else to give your death benefits to. Naming a non-profit as your contingent beneficiary ensures your money goes to a cause you believe in and not the state.
How to Set a Contingent Beneficiary
Setting up your contingent beneficiary is a relatively simple process. Usually, you can contact your life insurance company and follow these steps to add them to your policy.
- Provide your insurance company with the beneficiary’s full name, birthday, and Social Security number. The company may also ask for their contact information, making it easier to find them in the unlikely event that they get your payout.
- Explain your relationship with your beneficiary. This helps the company ensure you follow inheritance laws in your state.
- Decide what percentage of your benefits you want the beneficiary to have. Remember, the percentages for your contingency beneficiaries have to add up to 100%.
- Provide the contingent beneficiary with a copy of your insurance policy. This helps them know what to expect if you pass on.
How to Change Your Beneficiary
Changing your beneficiary is as simple as adding a beneficiary. You follow many of the same steps:
- Contact your insurance agent, insurance carrier, or Human Resources contact if you have a life insurance policy from your employer.
- Give your insurance company the new beneficiary’s name, birthday, Social Security number, contact information, and relationship to you.
- Decide what percentage of your benefits you want the beneficiary to have. You don’t need to change anything if you want them to have the same percentage as the person you’re replacing. However, you must recalculate your other beneficiaries’ percentages accordingly to give them a higher or lower share.
Putting It All Together
Having a contingent beneficiary is another way to ensure your loved ones are taken care of after you pass on. In many cases, you may name your spouse or children as your primary beneficiaries.
But if they also pass on, having contingency beneficiaries named ensures your money doesn’t get stuck in probate court while the state decides how to distribute it. You can rest easy knowing that the people you love have financial comfort during their time of grief. Naming your contingent beneficiary is simple and usually takes a few minutes — so consider doing so today.