You’ve probably heard of primary beneficiaries, which are the people who immediately get the assets you leave behind. But what about contingent beneficiaries? This is an individual or entity that comes into play if the primary beneficiary isn’t able to accept your inheritance for whatever reason.
While primary beneficiaries receive their inheritance outright, contingent beneficiaries don’t have any rights until the primary beneficiary passes away or can’t accept the inheritance.
What is a Contingent Beneficiary?
A contingent beneficiary is a secondary beneficiary who will receive the death benefit proceeds if the primary beneficiary can’t fulfill that role. If there are multiple primary beneficiaries, but one or more are deceased or unable to accept the proceeds, a contingent beneficiary will be named to receive those funds.
Why Name a Contingent Beneficiary?
Any time you have money riding on the beneficiary of your life insurance policy, it’s essential that there be a primary and contingent beneficiary. If you are willing to designate a contingent beneficiary, you are saying that if the primary beneficiary dies before you do, then the money will go to the contingent beneficiary.
The importance of designating a contingent beneficiary is often overlooked by people as they fill out their paperwork for life insurance policies. Most people simply designate their spouse or one of their children as the primary beneficiaries and don’t even think about a secondary beneficiary. This is a mistake.
Naming a contingent beneficiary is important in case your primary beneficiary dies before you do, or can’t inherit your assets for some other reason. For example, if you name your children as your primary beneficiaries and they pass away before you do, that means your assets will go to their children — but only if you have named those grandchildren as contingent beneficiaries. Failing to do so means your assets will go back into your estate and be distributed according to state law.
Primary vs Contingent Beneficiary
The primary beneficiary is the person, persons, or entity that receives the proceeds of an insurance policy or retirement account first. If you name your spouse as your primary beneficiary and he dies before you do, then the proceeds would go to your contingent beneficiary. If you do not name a contingent beneficiary, then it would be up to the courts to distribute your assets according to state law.
When naming a beneficiary, you have some flexibility in how you designate them. If you want to name more than one person as a beneficiary of your life insurance policy, for example, you can list them by percentage (John Smith 50% and Jane Smith 50%) or by order of preference (John Smith Primary and Jane Smith Contingent). If there are multiple beneficiaries but one dies before you do, then their share would be distributed among the other beneficiaries according to their percentages or order of preference.
Common Questions About Contingent Beneficiaries
Some people don’t realize that different kinds of assets can have different beneficiaries. For example, a will is a legal document that spells out who inherits your property when you die. But your IRA or 401(k) plan is governed by its beneficiary designation form, and your life insurance policy has its own beneficiary form.
Here are answers to some common questions about contingent beneficiaries:
1. What is a contingent beneficiary?
A contingent beneficiary is a person or entity who receives your assets if the primary beneficiary dies before you do. If you name more than one contingent beneficiary, the assets are divided among them.
2. Who should I name as my contingent beneficiary?
You may want to name your spouse as the primary beneficiary, with your children named as contingent beneficiaries. However, if you want to ensure that both your spouse and children inherit from you, you should make sure that each one’s share is clear in the documents.
3. Can I name multiple contingent beneficiaries?
Yes. If you have several children and wish to divide the proceeds equally among them, just list them all on the same line of the form and indicate that they are to divide the proceeds equally. You can also specify percentages for each contingent beneficiary.
The same can happen if you name an individual beneficiary who becomes mentally incompetent (for example, someone suffering from dementia) or otherwise unable to accept an inheritance. In this case, it’s critical that you’ve named a contingent
4. What happens if I don’t name a contingent beneficiary?
If you don’t designate a contingent beneficiary, and your primary beneficiary dies before you do, your death benefits will go to your estate unless you’ve named another alternate beneficiary (such as a contingent) in the insurance contract. If that happens, it could take years for the money to be distributed to the right people based on state laws governing intestate succession. It could also lead to unwanted family disputes over who should receive the money.
5. Do I need an attorney to become a contingent beneficiary?
You do not need an attorney to become a contingent beneficiary. However, if you have questions about legal matters related to your inheritance, we recommend contacting an attorney for assistance.