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Contingent Beneficiary: How to Choose One for Your Life Insurance Policy

Find out what you need to consider when choosing a contingent (or secondary) beneficiary for your life insurance policy and estate planning purposes.

Life insurance helps provide financially for the loved ones you leave behind when you die.

If you’re in the process of signing up for a life insurance policy, you may be asked to provide primary and contingent beneficiaries.

Most people understand that a primary beneficiary is the intended person that gets paid the death benefit when you die.

But what is a contingent beneficiary and why would you want one?

Here’s what you need to know to make sure you protect your loved ones, including how beneficiaries work.

Beneficiaries Defined

Many people don’t know you can have two types of beneficiaries on your life insurance policy.

These beneficiary types may apply to other accounts, such as retirement accounts, too.

Primary Beneficiaries

Primary beneficiaries are the people you want to receive your life insurance proceeds if everything goes according to plan.

You can list a single primary beneficiary if you want one person, such as your spouse, to receive the assets.

You can also list several primary beneficiaries.

For instance, a person may want to divide the life insurance proceeds between their four grown children.

In this case, they could assign 25% of the death benefit to each grown child as a primary beneficiary.

If any primary beneficiaries are living at the time of your death, they will be the ones to receive the proceeds.

Contingent Beneficiaries

Life doesn’t always go according to plan. Unfortunately, people end up dying. That is why you buy life insurance, after all.

However, most people don’t expect their primary beneficiaries to die before them. It happens, though.

So, rather than let the life insurance proceeds become part of your estate, people can set up contingent beneficiaries.

Contingent beneficiaries are those who will receive your life insurance death benefit if all of your primary beneficiaries had passed away before you.

If any of the primary beneficiaries are living, they’ll get the entire amount.

In these cases, the contingent beneficiaries receive nothing.

Per Stirpes vs. Per Capita

Beneficiaries have another layer you must also consider.

When you name beneficiaries of either type, you can name them as per stirpes or per capita.

These two types of beneficiaries help determine what happens to the money if one of your beneficiaries dies before you.

Under per stirpes, the death benefit that would be paid to a beneficiary that dies before you instead gets paid to their descendants.

Under per capita, the death benefit that would be paid to a beneficiary that dies before you gets split between the remaining living beneficiaries.

Let’s say you have your death benefit primary beneficiaries designated as your three adult children. Each child gets 33.3% upon your death.

If you choose per stirpes and one child dies, your two living children would each receive their 33.3% share.

Then, the money that would go to the child that died instead goes to their children.

If you choose per capita, things work differently.

Since two beneficiaries are still alive, the money would be split 50/50 between your two living children.

The children of the child who died would receive nothing.

How to Choose Beneficiaries

Choosing beneficiaries is a vital part of purchasing and updating your life insurance policy.

In general, most life insurance companies allow you to pick virtually anyone you want to be a designated beneficiary, except for minor children.

This includes people, trusts, charities, business partners or anyone else you want to name.

If you leave life insurance proceeds to a minor child, the legal guardian will manage the money for the child.

You usually name beneficiaries when you purchase your policy.

At this time, the life insurance company will ask you for information to identify your beneficiaries.

The information they request about beneficiaries can include their:

  • Name
  • Birthdate
  • Address
  • Social Security Number

You’ll need to provide this information for primary and contingent beneficiaries.

Getting this information correct is essential. This way, the life insurance company can verify the beneficiary after your death.

This information can change over time. Your beneficiaries may move.

When they do, you should be sure to update your beneficiary information on your policy as soon as possible.

Life can change, as well. You may get divorced. After divorce, you usually want to change your primary beneficiary from your ex-spouse.

You may want to list your new spouse as the primary beneficiary. Alternatively, you may want the money to go to a grown child or family friend.

Once your kids are no longer minors, you may want to make them your primary beneficiaries.

Thankfully, you can usually change your beneficiaries at any time. The rules vary depending on how your policy is set up, though.

How to Add a Contingent Beneficiary to Your Policy

When you initially signed up for your life insurance policy, you may not have realized what a contingent beneficiary was and left it blank.

In this case, you should contact your life insurance company and ask how to add a contingent beneficiary.

You may be able to do this online through a policy portal. Alternatively, you may have to send in a form.

That said, you should be able to add a contingent beneficiary to your policy in most cases.

What Happens If You Don’t Have a Contingent Beneficiary?

You may wonder what happens if I don’t have a contingent beneficiary.

If the primary beneficiary is still living at the time of your death, nothing happens.

The primary beneficiary gets paid.

The problem comes when all primary beneficiaries die before you. In this case, not having a contingent beneficiary means the death benefit gets paid to your estate.

When this happens, your estate must go through probate court.

This is a process where the courts are involved in distributing your assets, including the life insurance death benefit, after your death.

This can add a significant amount of time between your death and the time your heirs receive the death benefit payment.

It can also add court costs that must be paid. If your estate is large enough, you may have to pay estate taxes, too.

For this reason, it’s always good to name contingent beneficiaries. By doing so, you can control where the money goes without it going through probate.

How Primary and Contingent Beneficiaries Work in Practice

Some people understand primary and contingent beneficiaries best when they see examples.

Let’s say you purchased a term life insurance policy six years ago. You named your beneficiaries as follows:

  • Primary beneficiaries
    • Spouse at the time the policy was taken out - 50%
    • Adult child at the time the policy is taken out - 50%

  • Contingent beneficiaries
    • Specific charity - 100%

Five years after you take the policy out, your spouse and adult child pass away in an accident.

If you die today without changing your beneficiaries, that specific charity would get your full life insurance benefit.

If only your spouse or your adult child dies, the other would receive the full death benefit and the charity would receive nothing.

If you get divorced from your spouse at the time of the policy and your child dies, your ex-spouse would receive the total amount.

This is true even if you get remarried. This happens because you never updated your beneficiaries

Thankfully, you generally have control over your beneficiaries. All you have to do is fill out a form to change your beneficiaries in most cases.

If you get divorced or have a change of heart in who you want your beneficiaries to be, you should update them as soon as possible.

It’s possible the charity you selected as a contingent beneficiary may change how it operates to a point where you no longer support it.

Without changing your contingent beneficiary, they’d still receive the money if your primary beneficiaries die before you do.

Consult an Expert

Now you understand the answer to the question of what is a contingency beneficiary. This allows you to make an educated decision on who contingent beneficiaries should be.

Some people may choose family members or close friends. Others may choose a charity.

No matter who you choose, this is a serious decision.

You may want to consult an expert. They can help you if you’re unsure who to name or how to properly name a contingent beneficiary.

They may also be able to advise on the financial impacts or pros and cons naming one may have.

Your life insurance agent could help you figure these things out.

That said, people looking to purchase a life insurance policy and then name beneficiaries may not receive unbiased advice. This happens because the salespeople earn commissions.

A fee-only fiduciary financial can give you an objective opinion if you’re willing to pay their fee.

They don’t get paid on commission, so you know their advice isn’t influenced by money coming from others.

Fiduciaries must also give you advice based on your best interests.

Complex situations may be better handled by an estate planning attorney.

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