Who Gets Your Life Insurance Money: Contingent Beneficiaries Explained

A contingent beneficiary is a backup recipient of a life insurance policy, who will receive the benefit if the primary beneficiary is unable to. When purchasing life insurance, you will be asked to designate at least one primary beneficiary, and it is also recommended that you name at least one contingent beneficiary. This is important as it ensures that your financial legacy reaches the right hands, no matter what.

Who can be a contingent beneficiary?

A contingent beneficiary is a backup to your primary beneficiary in your life insurance policy. They are also known as secondary beneficiaries. Contingent beneficiaries are second in line to inherit your assets. They will receive the payout only if the primary beneficiary has died, cannot be located, refuses the payout, or is otherwise ineligible.

You can name any person, organization, business, or charity as your contingent beneficiary. You can also have multiple contingent beneficiaries and specify how the death benefit should be divided among them. For example, you could split your estate evenly between two children, allocate 60% of your estate to your child and 40% to another relative, or divide your assets between several philanthropic organizations.

If you have minor children, you can still name them as contingent beneficiaries, but you will need to designate a trustee or custodian to manage the payout funds until the children come of age.

While it is not required to name a contingent beneficiary when purchasing life insurance, it is highly recommended to ensure that your death benefit goes to a person or entity you care about and to avoid probate.

How many contingent beneficiaries can you have?

A contingent beneficiary is a backup to your primary beneficiary in your life insurance policy. They are also known as secondary beneficiaries. The contingent beneficiary comes into play only when the primary beneficiary can't receive the death benefit.

You can have as many contingent beneficiaries as you like, as long as their portions of the estate add up to 100%. You could split your estate evenly between two children, allocate 60% of your estate to your child and 40% to another relative, or divide your assets between several philanthropic organisations.

You can also choose to have multiple primary or contingent beneficiaries and specify how the death benefit should be divided. For example, you could name three primary beneficiaries, such as siblings, each receiving a third of the payout. If one of them can’t accept the benefit, the other two would split it evenly, while the contingent beneficiary would only receive anything if none of the primary beneficiaries are able to claim it.

When do contingent beneficiaries receive the payout?

Contingent beneficiaries receive the payout when the primary beneficiary is unable to accept the death benefit. This could be because the primary beneficiary has died, cannot be located, or is no longer eligible to receive the benefit. For example, if the primary beneficiary is the policyholder's spouse, and they get divorced, the contingent beneficiary would receive the payout. Similarly, if the primary beneficiary refuses the benefit or an organisation that is the primary beneficiary goes out of business, the contingent beneficiary will receive the payout.

In the case of life insurance, if the primary beneficiary passes away before the policyholder, the contingent beneficiary will receive the death benefit. If the primary beneficiary is still alive but cannot be located, the insurance company will contact the contingent beneficiary to distribute the death benefit.

It is important to note that contingent beneficiaries will only receive the payout if all primary beneficiaries are confirmed as deceased or otherwise unable to accept the benefit.

What happens if you don't name a contingent beneficiary?

If you don't name a contingent beneficiary, your death benefit will be paid to your estate and will be subject to estate taxes. This means that the payout will go through probate court, where a judge will determine the recipient. This process can be lengthy, and your heirs may not receive the payout for months. In the meantime, the benefit can be seized by creditors.

Additionally, if you don't name a contingent beneficiary, it may be unclear who is entitled to the funds, which can delay the benefit payment. This is especially important if your policy pays out in instalments rather than a lump sum. If your primary beneficiary passes away mid-payout and there is no contingent beneficiary named, the remaining funds may be held in probate.

Furthermore, if your primary beneficiary is unable to accept the payout for any reason, such as being a minor, and there is no contingent beneficiary, your assets will likely be put through probate court. This process can be slow and messy, and your heirs may receive a reduced amount due to administrative fees, taxes, and outstanding debts.

Therefore, it is essential to name at least one contingent beneficiary to ensure that your death benefit goes to the intended person or organization and to avoid any delays or complications.

How do you choose a contingent beneficiary?

Choosing a contingent beneficiary is an important step in ensuring that your life insurance benefits are allocated according to your wishes, even if your primary beneficiary is unable to accept the payout. Here are some factors to consider when selecting a contingent beneficiary:

Dependents

If you have dependents who would require financial support in your absence, it is crucial to consider who would care for them and manage any financial responsibilities. This could be a spouse, parent, sibling, or another trusted individual who would use the funds for the care and support of your dependents.

Adults vs. Minors

While naming adults as beneficiaries is relatively straightforward, naming minors requires additional considerations. If you wish to name a minor as a contingent beneficiary, you should explore options such as creating a trust or custodial account to manage the funds until they reach the age of majority. In most states, this age is typically 18, but it may vary depending on the account and state laws.

Financial Responsibilities

Consider who would be responsible for your financial obligations, such as debts, mortgages, or dependent care, if your primary beneficiary is unable to fulfil these duties. Choose a contingent beneficiary who is capable and trustworthy enough to handle these financial matters.

Charitable Organisations

If you have charitable causes or organisations close to your heart, you may want to consider naming them as contingent beneficiaries. This ensures that your money will go towards a meaningful cause if your primary beneficiary is unavailable.

It is worth noting that you can name multiple contingent beneficiaries and specify the percentage of the payout each one will receive. This allows for flexibility in allocating your life insurance benefits according to your wishes.

Frequently asked questions