Contingent Life Insurance: What You Need To Know

Contingent life insurance is a type of insurance policy that allows you to name a contingent beneficiary or secondary beneficiary who will receive the payout from your insurance policy if your primary beneficiary is unavailable, unable to be found, or has died. When you purchase a life insurance policy, you will be asked to name your primary beneficiary, who will be the first in line to receive the death benefit. However, in cases where the primary beneficiary is unable to accept the payout, a contingent beneficiary serves as a backup to ensure that the money goes to someone you intend it for without legal hassle and expense.

Who can be a contingent beneficiary?

A contingent beneficiary, or secondary beneficiary, serves as a backup to the primary beneficiaries named on a life insurance policy. When the policyholder passes away, if all of the primary beneficiaries have also passed away, the contingent beneficiaries will receive the payout.

When purchasing life insurance, you will be asked to designate at least one primary beneficiary. You should also name at least one contingent beneficiary, although this is not always required.

The number of beneficiaries you designate is entirely up to you. You can choose multiple contingent beneficiaries and set a percentage or amount of your payout for each to receive. However, contingent beneficiaries only receive a payout if all primary beneficiaries are confirmed as deceased.

When choosing a contingent beneficiary, it is important to select someone you trust with your payout. While primary beneficiaries are typically those closest to the policyholder, contingent beneficiaries might be more distant.

Contingent beneficiaries are often children, other family members, or philanthropic organisations. For example, you may name your spouse as the primary beneficiary and your two children as dual contingent beneficiaries. If your spouse passes away before you, your children will each receive a portion of your estate following your death.

You can also name organisations as contingent beneficiaries. For example, you could name a favourite charity as your contingent or tertiary beneficiary to keep the funds out of probate court.

It is important to note that pets and minor children cannot be named as beneficiaries. If you want to leave money to young children, you will need to assign a guardian or set up a trust to oversee the funds until the child comes of age.

Why have a contingent beneficiary?

A contingent beneficiary is a backup beneficiary who will receive your death benefit if your primary beneficiary is unable to. When you apply for a life insurance policy, you will be asked to name your primary beneficiary. The primary beneficiary will collect the death benefit if you pass away while your plan is still active. However, if your primary beneficiary passes away before you, is unable to be found, or refuses the payout, your contingent beneficiary will receive the benefit instead.

While it is not mandatory to name a contingent beneficiary, it is highly recommended. If you do not have a contingent beneficiary and your primary beneficiary is unable to receive the payout, your estate may have to go through the probate process, which can reduce the benefit due to fees. The probate process can also be time-consuming, taking several months to complete.

You can name any person, organization, or business as your contingent beneficiary. You can also name multiple contingent beneficiaries and divide your estate among them as you see fit, as long as the portions add up to 100%.

It is important to review and update your beneficiary designations regularly, especially after major life events such as marriage, divorce, or the death of a loved one. This will help ensure that your wishes are carried out smoothly after your passing.

In summary, having a contingent beneficiary provides peace of mind and ensures that your assets will go to the people or organizations you care about, even if your primary beneficiary is unable to receive the payout. It also helps streamline the payout process and can reduce the time and costs associated with probate.

How does the payout process work?

When you purchase a life insurance policy, you will be required to list at least one primary beneficiary. This person or entity will be first in line to receive the payout from your life insurance policy when you pass away. You can also list multiple primary beneficiaries and divide the payout among them as you wish. However, it is important to note that you cannot name minor children as beneficiaries. Instead, you must name a legal guardian who will accept the life insurance payout on their behalf until they reach adulthood.

While it is not mandatory, it is highly recommended that you also list at least one contingent beneficiary when purchasing life insurance. A contingent beneficiary, also known as a secondary beneficiary, serves as a backup to the primary beneficiaries. If all your primary beneficiaries have passed away or are otherwise unable to receive the payout, the contingent beneficiary will receive it instead.

Upon your death, your insurer will first attempt to contact your primary beneficiaries using the information you have provided. If they can confirm that all primary beneficiaries are no longer living or are unable to accept the payout, they will then reach out to your contingent beneficiaries. Those who are living will receive the death benefit as instructed in your policy.

If you do not have any contingent beneficiaries listed and your primary beneficiaries are deceased or unable to receive the payout, the death benefit will be paid to your estate instead. This means that it will be subject to estate taxes and will have to go through probate court, where a judge will determine the recipient. This process can take several months and may result in the payout being seized by creditors or distributed in a way that you did not intend.

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 the people or organisations they had selected. The payout will then be subject to estate taxes and will go through probate court, where a judge will determine the recipient. This process can take several months, as it involves using the estate to pay off creditors. If there were no debts, the probate court would determine who should receive the remaining assets.

If there is no contingent beneficiary, the distribution of assets is left up to the courts and state laws. This increases the risk of death benefit proceeds going to the estate, which can increase the chance of estate taxes being applied. It is also likely that distribution will be delayed.

It is not a requirement to name a contingent beneficiary, but it is highly recommended to ensure the payout goes to the desired person or organisation.

Can I have multiple contingent beneficiaries?

Yes, you can name multiple contingent beneficiaries. In fact, it is highly recommended that you name at least one contingent beneficiary, in addition to your primary beneficiary. This is because, in the event that your primary beneficiary predeceases you, cannot be found, or refuses the inheritance, your contingent beneficiary will then be next in line to receive your assets.

You can assign as many primary and contingent beneficiaries as you want, although some policies or accounts may limit you to a maximum number. The total percentage of life insurance proceeds assigned to each of the primary beneficiaries needs to total 100%, and the same goes for contingent beneficiaries.

For example, you could assign the following beneficiary structure for your $600,000 death benefit:

• Primary beneficiary: your spouse
• Contingent beneficiaries: your three children

In this scenario, if you pass away, your spouse will receive the full $600,000 death benefit. However, if you and your spouse pass away, your children will receive the death benefit instead, with each child receiving an equal share.

It is important to note that if your children are minors, they may not be able to access the funds right away. In this case, the payout may be held in trust until they become adults. Therefore, you may need to select a custodian or trustee to manage the payout funds until your children come of age.

Frequently asked questions