Who Gets Your Life Insurance Payout: Primary Vs. Contingent Beneficiaries

A contingent beneficiary is a person chosen to inherit some or all of your assets, but only if the primary beneficiary is unable to accept them. When you apply for life insurance, you will be asked to name a primary beneficiary, who will receive the death benefit if you pass away while your plan is still active. However, if the primary beneficiary is deceased, unable to be found, or refuses the payout, the contingent beneficiary will be entitled to the benefit. The contingent beneficiary life insurance payout process is straightforward, as long as the policyholder names their beneficiaries before they pass away.

Who can be a contingent beneficiary?

A contingent beneficiary is a backup beneficiary who will receive the benefit of your life insurance policy if your primary beneficiary cannot. This could be because the primary beneficiary has died, cannot be found, or refuses the payout.

You can name any person, organisation, or business as your contingent beneficiary. This includes:

• Family members such as children, grandchildren, cousins, nieces, and nephews
• Close friends and loved ones
• Charities and organisations
• Business partners or your company
• Trusts for minor children or disabled beneficiaries

You can name multiple contingent beneficiaries, but you will need to provide their full names and contact information, Social Security numbers, and the percentage of the death benefit allocated to them. The total percentages must add up to 100%.

How do contingent beneficiaries work?

A contingent beneficiary is a person, organisation, or charity chosen by the policyholder to inherit some or all of their assets if the primary beneficiary cannot accept them. Also known as a secondary beneficiary, a contingent beneficiary is a backup option in case the primary beneficiary is unavailable, unable to be found, or deceased.

For example, if you name your spouse as the primary beneficiary for your life insurance payout, and your child as the contingent beneficiary, your spouse will receive the death benefit if they outlive you. However, if your spouse passes away before you, the life insurance proceeds will go to your child.

In the event that all primary beneficiaries are deceased, the insurance company will reach out to the contingent beneficiary or beneficiaries. The death benefit will then pass to the person or organisation named by the policyholder.

While it is not a requirement to name a contingent beneficiary, it is recommended to ensure that the policyholder's assets go to the intended recipient or recipients. Without a contingent beneficiary, assets may enter probate, which can be a lengthy and costly process.

The number of contingent beneficiaries is up to the policyholder, and they can choose to divide their estate among them as they wish, as long as the portions add up to 100%. Contingent beneficiaries can be changed as often as the policyholder wishes, and it is important to review and update beneficiaries after major life changes.

Primary beneficiary vs. contingent beneficiary

A beneficiary is a person or entity designated to receive benefits, such as assets from an estate, life insurance proceeds, retirement accounts, and annuities. The primary beneficiary is the first person or entity in line to receive the benefits. The contingent beneficiary, also known as the secondary beneficiary, is the second in line to receive the benefits.

You can name multiple primary beneficiaries and decide how the benefits will be split between them. For example, if you have two children, you can designate both as the primary beneficiaries of your life insurance policy. At your death, the children will receive the benefits according to the percentages you choose.

A contingent beneficiary can only receive benefits if all primary beneficiaries are deceased, unable to be located, refuse to accept the benefits, or cannot legally accept the inheritance. For instance, if you have two children and name your daughter as the primary beneficiary and your son as the contingent beneficiary in your will, only your daughter will receive the assets when you die. However, if your daughter predeceases you, refuses the assets, or cannot be found, your son will then receive the assets.

It is a good idea to name both primary and secondary beneficiaries to account for unexpected life changes. If the policy owner passes away without naming beneficiaries, or if the beneficiaries are unable or unwilling to accept the inheritance, then your assets may have to go through probate or a liquidation process, which can be costly and time-consuming.

The contingent beneficiary life insurance payout process

Firstly, when you purchase your policy, you should choose at least one contingent beneficiary in addition to your primary beneficiaries. You can name any person, organisation, business, or charity as your contingent beneficiary. You can also have multiple contingent beneficiaries and divide your estate among them. However, if you choose a child as your contingent beneficiary, you'll need to designate a trustee to manage the estate on their behalf until they come of age.

After your death, your insurance company will reach out to your primary beneficiary to distribute your death benefit. If your insurance provider can't find your primary beneficiary or confirms their death, they will contact your contingent beneficiary or beneficiaries. The death benefit will then pass to the person or organisation named in your estate plan.

If you do not name a contingent beneficiary, your death benefit will be paid to your estate instead of your chosen recipients. It will then be subject to estate taxes and go through probate court for a judge to determine its recipient.

Do I need a contingent beneficiary?

While it is not a requirement to name a contingent beneficiary when purchasing life insurance, it is highly recommended. A contingent beneficiary acts as a backup to your primary beneficiary/beneficiaries, ensuring that your death benefit goes to someone you care about in the event that your primary beneficiary/beneficiaries are no longer alive or able to receive the payout.

If you do not name a contingent beneficiary, your death benefit will be paid to your estate instead of the people or organisations you've selected. This means that your payout will be subject to estate taxes and will have to go through probate court, which can be a lengthy and costly process. It will then be up to a judge to determine the recipient of your benefit, and once paid to your estate, it can be seized by creditors or take months to reach your heirs.

Therefore, it is a good idea to name at least one, if not multiple, contingent beneficiaries. This will ensure that the payout process is swift and smooth, and that your benefit goes to the people or organisations you want.

You can name any person or organisation as your contingent beneficiary/beneficiaries, and you can choose how much of your payout each beneficiary will receive. However, if you name minor children as beneficiaries, you will need to select a custodian to manage the payout funds until they come of age.

It is also important to regularly review and update your beneficiary designations throughout the term of your policy, especially after major life events such as marriage, divorce, or the death of a loved one.

Frequently asked questions