Choosing A Contingent Beneficiary: Life Insurance Essentials

Choosing a beneficiary for your life insurance is a crucial step in purchasing your policy. While you are required to list at least one primary beneficiary, it is also important to consider choosing a contingent beneficiary, who will receive your life insurance payout if your primary beneficiary passes away before you or at the same time. This can help to ensure that your death benefit is distributed according to your wishes and prevent legal proceedings that could cost your loved ones time and money.

The role of a contingent beneficiary

The primary beneficiary is usually a spouse or child, but it could also be a business or charity. However, life is unpredictable, and there may be circumstances in which your primary beneficiary is no longer available. For example, the primary beneficiary may pass away before you, or the insurance company may be unable to locate them. In these cases, the life insurance company will deliver the death benefit to the contingent beneficiary.

You can name multiple contingent beneficiaries and decide how the payout will be split between them. It is recommended that you name a contingent beneficiary when setting up your policy, as this will ensure that your death benefit is distributed according to your wishes. If you do not name a contingent beneficiary, your death benefit will be paid to your estate and may be subject to probate court, estate taxes, and claims from creditors.

Why you need a contingent beneficiary

When purchasing life insurance, you'll be asked to designate at least one primary beneficiary. Naming a contingent beneficiary is not mandatory, but it is highly recommended. A contingent beneficiary is a backup beneficiary that will receive the payout from your policy if the primary beneficiary cannot. Here are some reasons why you need a contingent beneficiary:

Peace of Mind

A contingent beneficiary acts as a backup plan for your life insurance payout. Life is unpredictable, and circumstances may arise where your primary beneficiary is no longer available or able to receive the funds. For example, your primary beneficiary may pass away before you, refuse the life insurance benefit, or cannot be located. In these situations, the life insurance company will deliver your death benefit to the contingent beneficiary as next in line. This ensures that your death benefit goes to a person or entity of your choosing.

Streamlined Payout Process

Naming both a primary and contingent beneficiary during the purchasing process can help streamline the payout process. When you pass away with an active policy, your insurer will first reach out to the primary beneficiaries. If they are no longer living or unable to accept the payout, the insurer will then contact your contingent beneficiaries. This helps the payout process move swiftly and efficiently.

Avoid Probate Process

If you do not have a contingent beneficiary and your primary beneficiary is unable to claim the payout, your assets may enter probate. This means that a judge will determine the recipient of your death benefit, and your payout will be subject to estate taxes and additional fees. The probate process can be time-consuming and costly for your loved ones, and you will not have a say in who ultimately receives the money.

Ensure Children's Wellbeing

Despite listing a spouse or partner as the primary beneficiary, many people intend for their life insurance to also protect their children from financial hardship. If both you and your spouse pass away, a contingent beneficiary can help ensure that your children are still provided for. It is important to note that if you list a minor child as a contingent beneficiary, a court may need to decide who will manage the funds until they reach legal age. A possible solution is to name a contingent beneficiary who is also designated as your children's caretaker in your will.

Choosing a contingent beneficiary

A contingent beneficiary, also referred to as a secondary beneficiary, is the person or entity that inherits your life insurance death benefit if your primary beneficiary cannot. This could be because the primary beneficiary has passed away, cannot be located, or refuses the benefit. By naming a contingent beneficiary, you can ensure that your payout goes to someone or an organisation of your choosing, rather than becoming part of your estate.

When choosing a contingent beneficiary, it is important to select someone you trust to manage your assets. This could be a spouse, child, other relative, close friend, charity, or organisation. You can also name multiple contingent beneficiaries and allocate a percentage of the payout that you would like each to receive. If you name a minor as a contingent beneficiary, a legal guardian will oversee the funds until they are of age.

It is also recommended that you review and update your beneficiaries regularly, especially after significant life changes such as marriage, divorce, or the death of a spouse.

How many contingent beneficiaries to name

How many contingent beneficiaries you choose to name is entirely up to you. You can name multiple contingent beneficiaries and decide on the percentage of the payout each will receive. However, it is important to remember that contingent beneficiaries are a backup plan for your death benefit; they will only receive a payout if all primary beneficiaries are confirmed as deceased.

In addition to the number of contingent beneficiaries, you should also consider who these individuals or entities will be. While primary beneficiaries are typically those closest to you, contingent beneficiaries might be more distant. However, they should still be individuals or organizations you trust with your payout.

For example, if you have a spouse and children, you may designate your spouse as the primary beneficiary and your parents as the contingent beneficiaries. In the case that both you and your spouse pass away, the death benefit will go to your parents, who would likely use the funds to care for your children. Once your children are adults, you can update your contingent beneficiaries to be your children.

If you do not want to leave your death benefit to family members or close friends, you can select one or more organizations as your secondary beneficiaries. This allows you to leave a legacy through your death benefit if your primary beneficiaries are no longer living.

Updating your contingent beneficiaries

Timing and Frequency of Updates

It is recommended to review and update your beneficiaries regularly, especially after significant life events or milestones. These can include marriage, divorce, the birth or adoption of a child, or the death of a loved one. Other major life changes, such as significant financial shifts, retirement, or estate planning, may also prompt a review of your beneficiary designations. By updating your contingent beneficiaries promptly after such events, you can ensure that your policy remains aligned with your current life circumstances and wishes.

Choosing the Right Contingent Beneficiaries

When selecting or updating your contingent beneficiaries, it is essential to choose individuals or entities you trust to manage your assets and carry out your wishes in the event of your passing. If you have minor children, consider choosing someone who can handle their finances responsibly and provide for their future. It is also worth noting that you can name multiple contingent beneficiaries and allocate specific percentages or amounts of your payout for each to receive.

Avoiding Common Mistakes

When updating your contingent beneficiaries, be mindful of a few common mistakes to avoid. Firstly, ensure that your chosen beneficiaries are eligible to receive the benefit. The "insurable interest" principle states that beneficiaries must have a legitimate reason to receive the benefit, typically demonstrating financial loss or hardship due to your passing. Additionally, if you name a minor child as a beneficiary, be prepared to select a custodian or legal guardian to manage the funds until the child reaches the age of majority.

Understanding the Payout Process

Understanding how the payout process works with contingent beneficiaries is crucial. When you pass away with an active policy, your insurer will first attempt to contact your primary beneficiaries. If they confirm that all primary beneficiaries are deceased or unable to receive the benefit, they will then reach out to your contingent beneficiaries. These living contingent beneficiaries will then receive your death benefit as per your instructions in the policy.

Notifying Beneficiaries

Once you have updated your contingent beneficiaries, it is a good idea to notify them of their designation and provide them with the details of your insurer. This ensures that they are aware of their role and can take the necessary steps to claim the payout when the time comes.

Remember, choosing and updating your contingent beneficiaries is a crucial aspect of maintaining your life insurance policy. By following these steps and staying proactive, you can help ensure a smooth payout process and protect your loved ones' financial future.

Frequently asked questions