Life Insurance

What Is a Contingent Beneficiary?

While the primary beneficiary is the first person named to receive the death benefits of a policyholder in case they pass away, if they’re unable to collect for some reason, then the contingent beneficiary steps in.

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A contingent life insurance beneficiary is essentially the person second in line to claim life insurance policy benefits in the event of the insured’s death. The primary beneficiary is the first person named to receive the benefits, but if they’re unable to collect for some reason, then the contingent beneficiary steps in.

Selecting life insurance beneficiaries is an important decision. Sometimes having a contingent beneficiary can ease the burden of having to select just one person.

Why Have a Contingent Beneficiary?

Life insurance policies come with a lot of options, but in general, life insurance policies pay out a sum of money upon the death of the insured person. The payout, or death benefit, will go to the beneficiary named in the policy. If for any reason the primary beneficiary cannot claim the benefit, then a contingent beneficiary will receive the money.

A life insurance policy is not intended to make someone wealthy if another person dies. Its purpose is to pay for funeral and burial costs and, in some situations, replace the lost income of the deceased.

Imagine that Jane is married to John and they have two adult children, Sally and Steve. Jane lists John as the primary beneficiary on her life insurance and lists each child as a contingent beneficiary, splitting the proceeds 50/50 upon her death. If Jane and John both die, then Jane’s life insurance beneficiaries are Sally and Steve since John cannot collect.

What is the Difference Between a Primary and Contingent Beneficiary?

The primary beneficiary is the first in line to collect on a life insurance policy but there are times when they cannot collect, and then the proceeds of the insurance go to the contingent beneficiary.

Obviously, if the primary beneficiary dies, they won’t be able to collect, but there are some other situations where the proceeds would not go to the contingent beneficiary. Some of the more common times a primary beneficiary is skipped over, other than death, is if they cannot be found or they refuse the death benefit.

Who Can Be a Contingent Beneficiary?

Just about anyone can be a contingent beneficiary, except the primary beneficiary or the policyholder. Most people list additional family members as contingent beneficiaries, some opt to have friends listed, their business partner, or a favorite charity or non-profit.

Some companies may allow a succession of contingent beneficiaries. Consider if Jane listed John as primary on her life insurance, her children Sally and Steve as contingent beneficiaries, and then as third beneficiaries, she listed three of her favorite charities to divide the proceeds evenly. This is totally acceptable.

In fact, she could have listed her three favorite charities in order, setting one up to be the third beneficiary, one to be the fourth, and one as the final. In that situation, they don’t split the money but collect in that order. There’s a lot of flexibility when it comes to naming contingent beneficiaries.

How to Choose Your Contingent Beneficiary

Selecting a primary and contingent beneficiary often requires a view of someone’s financial situation. Generally, the death benefit would go to someone who is considered next of kin or most likely to suffer a financial loss with the death of the policyholder. This is also often the person who will be responsible for funeral and burial payments.

It can be difficult to determine who should be primary and who should be secondary. There are some legal hurdles that might also restrict who can be named as a beneficiary.

  • A spouse: In many situations, a spouse is the primary, but there are cases where someone would prefer to have the spouse as contingent and someone else as primary. This is okay in most situations but not all. In some court orders, such as divorce decrees, a spouse or ex-spouse might be ordered as primary. Additionally, in community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin) the spouse must be primary, so they cannot be listed as a contingent beneficiary.
  • Minor children: Unfortunately, minor children cannot directly receive death benefits from a life insurance policy. This doesn’t mean they can’t be named as primary or contingent beneficiaries, but if the policyholder dies before the children reach the age of 18 then a legal guardian will be appointed by the state (if one hasn’t been pre-appointed) and that individual will decide how the money can be spent.

When Can a Contingent Beneficiary Claim Death Benefits?

Being a contingent beneficiary does not guarantee any portion of the life insurance policy. If the primary is alive to collect and willing to do so, then the death benefit goes entirely to them.

In most situations, the contingent beneficiary does not collect unless the primary has also died, but there are some exceptions.

  • Primary refuses the death benefit: It doesn’t matter why the primary decides to refuse the death benefit. If they do, the money goes to the contingent beneficiary.
  • Primary beneficiary cannot be located: If the primary beneficiary cannot be found, then insurance proceeds will go to the next in line.
  • Primary beneficiary is alive, but incapacitated: If the primary beneficiary is alive but incapacitated or otherwise not of sound mind, the contingent beneficiary may move up to primary position. This is a tricky situation, and it may end up going to court. It all depends on the level of incapacitation involved and other underlying factors.
  • Primary beneficiary is incarcerated: If the primary beneficiary is incarcerated at a state or federal level, they might lose all claim to any life insurance policies where they are named the primary beneficiary. This will be determined by the state and the offense for which the person is incarcerated. In some situations, they’ll lose the right to claim the money, in other situations the death benefits might be used to pay restitution to their victims.
  • Primary responsible for death of policyholder: If the primary beneficiary is responsible for the policyholder’s death, they cannot benefit through a life insurance policy. This falls under the Slayer Rules.

Changing Your Beneficiaries

Changing your beneficiaries, both contingent and primary, is a fairly easy process that requires some paperwork. Most people go through a number of life changes after they take out an insurance policy and each change may prompt a beneficiary change. Some common reasons to change beneficiaries include:

  • Marriage
  • Divorce
  • Death of named beneficiary
  • Birth or adoption of children
  • Change in financial situation for policyholder or a beneficiary
  • Moving to or out of a community property state
  • Buying a new home
  • New estate plan
  • New business venture or partnership
  • Importance of a charitable organization in the policyholder’s life
  • Changing mind

Most of the time, changing the beneficiary is not very difficult unless there is an irrevocable beneficiary that has been named. In that case, there are some additional steps involved. Primarily, the beneficiary will have to provide written consent to be removed as a beneficiary.

The insurance company can help set up the paperwork for any beneficiary changes and explain options available for everyone involved.