Who Gets Your Life Insurance: Contingent Beneficiary Basics

When you take out a life insurance policy, you will be asked to name a primary beneficiary, who will receive the payout when you die. However, if that person or organisation is no longer alive or is otherwise unable to accept the payout, the money will go to your contingent beneficiary. Also known as a secondary beneficiary, this person or organisation is therefore a backup to your primary beneficiary.

Who can be a contingent beneficiary?

A contingent beneficiary, or secondary beneficiary, is a backup to the primary beneficiaries named on your life insurance policy. This means that if all your primary beneficiaries have passed away, your contingent beneficiaries will receive the payout.

You can name any person or organisation as your contingent beneficiary. This could be your children, other family members, or philanthropic organisations. You can also name multiple contingent beneficiaries and divide your estate among them. For example, you could split your estate evenly between two children, or give 60% of your estate to your child and 40% to another relative.

However, if you name minor children as beneficiaries, even contingent ones, you will need to select a custodian to manage the payout funds until the children come of age.

You can also establish criteria around your contingent beneficiary's inheritance. For example, you could name your child as the secondary beneficiary of your life insurance payout, but only after they finish college.

When do contingent beneficiaries receive the death benefit?

Contingent beneficiaries, also known as secondary beneficiaries, are the recipients of the death benefit from a life insurance policy if the primary beneficiary is unable to accept the proceeds. This could be because the primary beneficiary is deceased, cannot be located, or refuses the payout. In the absence of a living primary beneficiary, the contingent beneficiary will receive the death benefit.

The process of distributing the death benefit typically begins with the insurance company reaching out to the primary beneficiary. If the insurance provider cannot locate the primary beneficiary or confirms their death, they will then contact the contingent beneficiary. The death benefit will then be distributed to the contingent beneficiary as instructed in the policy.

It is important to note that the contingent beneficiary only receives the payout if all primary beneficiaries are confirmed as deceased or otherwise unable to accept the proceeds. The number of contingent beneficiaries designated is up to the policyholder, and the benefit can be divided among multiple beneficiaries as specified in the policy.

While designating a contingent beneficiary is not mandatory when purchasing life insurance, it is highly recommended. Without a contingent beneficiary, the death benefit may be paid to the estate instead, subjecting it to estate taxes and probate court. Designating a contingent beneficiary ensures that the death benefit goes to the intended individuals or organisations swiftly and securely.

What happens if there is no contingent beneficiary?

If there is no contingent beneficiary, the death benefit will be paid to the estate of the deceased instead of to the people or organisations they may have selected. The payout will then be subject to estate taxes and will have to go through probate court, where a judge will determine the recipient. This process can be lengthy, and once the benefit is paid to the estate, it can be seized by creditors.

The primary purpose of naming a contingent beneficiary is to avoid probate, which can be costly and time-consuming for the estate. If there is no contingent beneficiary, the assets will be distributed according to the succession line that the state follows. This means that the courts will step in, and the deceased will have no control over who ends up with their assets.

It is important to note that the absence of a contingent beneficiary can also increase the risk of death benefit proceeds going to the estate, which can increase the chance of estate taxes being applied. Additionally, the distribution of the assets is likely to be delayed.

Can I have multiple contingent beneficiaries?

Yes, you can have multiple contingent beneficiaries. In fact, it is recommended to have more than one, in addition to your primary beneficiary.

When you purchase a life insurance policy, you will be asked to name at least one primary beneficiary. You can then choose one or more contingent beneficiaries, who will act as a backup in case your primary beneficiary is unable to receive the payout. This may be because they have died, cannot be found, or refuse the payout.

You can choose any person, organisation, or business as your contingent beneficiary. If you choose a child, you will need to designate a trustee to manage the estate on their behalf until they turn 18.

You can divide your estate among multiple contingent beneficiaries in whatever portions you choose. For example, you could split your estate evenly between two children, or give 60% to your child and 40% to another relative.

When should I name a contingent beneficiary?

You should name a contingent beneficiary when you're setting up a life insurance policy, retirement account, or living trust. A contingent beneficiary is a backup beneficiary who will inherit your assets if your primary beneficiary is unavailable, cannot be found, refuses the inheritance, or passes away before you.

While it's not mandatory to name a contingent beneficiary, it's a good idea to do so. If you don't, and your primary beneficiary is unable to accept your assets, they may end up in probate. This can be a lengthy and costly process, and your assets may be distributed according to state law, rather than your wishes.

You can name almost anyone as a contingent beneficiary, including a spouse, child, other family member, friend, or charity. You can also name multiple contingent beneficiaries and divide your estate among them as you see fit. However, if you name a minor as a contingent beneficiary, you'll need to select a custodian to manage the payout funds until they come of age.

It's important to keep your beneficiary designations up to date. Remember to review them after major life events, such as marriage, divorce, or the death of a loved one.

Frequently asked questions