Contingent Percentages: Understanding Your Life Insurance Coverage

When purchasing life insurance, you will be asked to designate at least one primary beneficiary. This is the person or entity who will receive the benefits or proceeds of your policy when you pass away. You can also name a contingent beneficiary, or secondary beneficiary, who serves as a backup to the primary beneficiary. If your primary beneficiary has also passed away, is unable to be located, or refuses the inheritance, the contingent beneficiary will receive the payout. You can name multiple primary and contingent beneficiaries and decide how the benefits will be split between them in terms of percentages.

Who can be a beneficiary?

A beneficiary is a person or entity designated to receive benefits from the policyholder's life insurance proceeds. There are two types of beneficiaries: primary and contingent. A primary beneficiary is the first person entitled to receive the benefits, and a contingent beneficiary is next in line.

When choosing beneficiaries, it is essential to remember that they must have the legal power to claim an asset. For example, minor children cannot be beneficiaries. If the policyholder wants to leave money to young children, they will need to assign a guardian or set up a trust to oversee the funds until the child comes of age.

The number of beneficiaries that a policyholder designates is entirely up to them, and they can be any person, a trust, a charity, or entity. The policyholder must assign a whole percentage to each beneficiary, ensuring that the percentages for primary beneficiaries total 100%, and the same for contingent beneficiaries.

It is recommended that policyholders review their beneficiary designations every three to five years and after any significant life events, such as marriage, divorce, or the death of a loved one. This ensures that the designations remain up to date and reflect the policyholder's wishes.

How to assign beneficiaries?

When you purchase a life insurance policy, you will be given the option to designate beneficiaries to receive a death benefit in the event of your death. A beneficiary can be a person, a charity, a business, or a trust. If the beneficiary is a person, they can be a relative, child, spouse, friend, or anyone else you know.

There are two types of beneficiaries: primary and contingent. A primary beneficiary is the person or persons first in line to receive the death benefit from your life insurance policy. Typically, this is your spouse, children, or other family members. In the event that your primary beneficiary dies before or at the same time as you, most policies allow you to name at least one backup beneficiary, called a "secondary" or "contingent" beneficiary. If all the primary beneficiaries are deceased, the secondary beneficiaries will receive the death benefit.

• Understand the types of beneficiaries: As mentioned earlier, primary beneficiaries are the first in line to receive the death benefit, while contingent beneficiaries are the backup option.
• Identify your primary beneficiaries: Consider your spouse, children, or other family members as your primary beneficiaries. These are the people who are closest to you and would be most affected by your death.
• Determine your contingent beneficiaries: Choose your contingent beneficiaries as a backup plan. They can be individuals or organizations you trust and who you believe should receive the death benefit if your primary beneficiaries are no longer alive.
• Specify the percentage or amount of the payout for each beneficiary: You can assign a percentage of the death benefit to each beneficiary, ensuring that the total percentage equals 100%. Alternatively, you can assign a dollar amount to each beneficiary, but this is not recommended as policies can change in value over time.
• Provide the required information: When assigning a beneficiary, you will need to provide their full legal name, mailing address, email, phone number, date of birth, and Social Security number. This information will help the insurance company verify and locate your beneficiaries when needed.
• Review and update your beneficiaries regularly: Keep your beneficiary designations up to date, especially after major life changes such as marriage, divorce, or the birth or death of a loved one. This ensures that your wishes are carried out as intended.
• Notify your beneficiaries: Inform your beneficiaries that they have been named on your policy and provide them with the contact information of your insurer. This will enable them to claim the payout when the time comes.
• Seek professional guidance if needed: If you have any questions or concerns, consult a financial professional or attorney to ensure that your beneficiary designations are accurate and aligned with your wishes.

How many beneficiaries can be named?

When it comes to life insurance, the person who receives the payout or death benefit from the policy is called the beneficiary. There are two types of beneficiaries: primary and contingent. The primary beneficiary is the first in line to receive the death benefit and is typically a spouse, child, or another family member. Contingent beneficiaries, also known as secondary beneficiaries, are backup recipients who will receive the payout if the primary beneficiary is no longer alive or is unable to accept the inheritance.

The number of contingent beneficiaries that can be named is flexible. You can have one or several contingent beneficiaries, and it is up to the policy owner to decide how many they would like to designate. The key consideration is that the percentages assigned to each beneficiary must add up to 100% of the total payout. For example, if there are two contingent beneficiaries, each would receive 50% of the payout. Similarly, for three contingent beneficiaries, the payout could be split into 50%/30%/20% or any other combination that totals 100%.

It is important to carefully consider who to name as contingent beneficiaries. While they may be less closely related to the policy owner than the primary beneficiaries, they should still be individuals or organizations that the owner trusts to receive the payout. It is also crucial to regularly review and update the list of contingent beneficiaries, especially after significant life changes such as marriage, divorce, the birth of a child, or the death of a loved one.

What happens if there is no beneficiary?

If there is no beneficiary listed on a life insurance policy, or none of the beneficiaries are alive, the death benefit is typically paid out to the estate of the deceased. The estate includes the sum of the deceased's belongings, such as investments and property. What happens to the assets in the estate is then determined by a combination of factors, such as the existence of a will, any outstanding debts, and the deceased's state of residence.

Life insurance proceeds that are paid to an estate become part of the estate's assets, which are distributed according to the deceased's will, if one exists. If there is no will, or if the will is unclear, invalid, or contested, the estate may go into probate, which is a legal proceeding that oversees the distribution of an estate to the rightful heirs.

The probate process can be lengthy, often taking a year or longer. If a will is contested, the process may be significantly delayed while the case is litigated. During probate, the will is authenticated, an executor is approved, assets are located and assessed, taxes and other debts are paid, and the remaining assets are distributed according to the will.

If the deceased did not leave a will, the courts will typically make all the decisions and will assign a representative to function as the estate's executor. In cases where no will exists and no living relatives are found, an estate's assets default to the state of residence.

It is important to note that once the proceeds of a life insurance policy are turned over to the deceased's estate, the death benefit becomes taxable, and the assets in the estate are used to pay down any remaining debts of the deceased prior to distribution to heirs. This can significantly reduce the amount ultimately received by the intended beneficiaries.

How often should beneficiaries be reviewed?

Beneficiaries should be reviewed regularly and at least once a year. This is because life changes frequently, and your life insurance coverage will need to change with every major life event to some degree.

It is recommended that you review your life insurance policy annually to ensure that your beneficiaries are always covered and that your premium costs are where they should be. Checking in yearly will also help you to plan for any changes that you can see coming in the year ahead. For example, if you are planning to start a family, you may wish to increase your coverage to ensure your family is provided for in the event of your death.

You should also review your beneficiaries after major life events, such as marriage, divorce, the birth of a child, or the death of a loved one. This will allow you to add, remove, or change your designations as necessary.

It is important to keep your beneficiary information up to date to ensure a smooth payout process after your passing and to prevent your death benefit from being subject to estate taxes.

Frequently asked questions