What is Meant by Contingent Beneficiary?

Buying insurance can be a daunting experience. The first step is actually thinking about your death and what will happen to your loved ones after you are gone. If that is not overwhelming enough, you then have to dive into a world filled with terms you do not know. One wrong step could lead to you making payments for something you do not even need for the rest of your life. But we cannot have that, can we? Which is why it is important to know all the terms and how you can get the best policy when getting life insurance.

One of these terms to know that can prove to be quite advantageous is a contingent beneficiary.

What is a Contingent Beneficiary?

Defining contingent beneficiary, it is the person who receives the assets, death benefit and/or estate of a person who dies granted that the primary beneficiary cannot receive it.

So basically, a contingent beneficiary is the next in line alternative if the primary beneficiary is either deceased, cannot be located or refuses the inheritance when it is time for the proceeds to be paid out.

A contingent beneficiary will only receive insurance proceeds or retirement assets if the insured had clearly specified that they would be the contingent beneficiary of their inheritance either by naming them in their insurance agreement or by naming them in a will. These certain predetermined conditions need to be met in order for contingent beneficiaries to receive any inheritance.

For a contingent beneficiary who has been named in a will, any conditions that have been put in place depend on the person who is drafting the will. If the primary beneficiary decides to accept the inheritance, the contingent beneficiary will receive nothing. For example, if a woman named Susan lists her husband Jack as the primary beneficiary for her life insurance policy and their two children as contingent beneficiaries, in case of her death, her husband Jack will receive the payout from her policy and the children will receive nothing. However, if Jack dies before her, both her children will each receive half of the proceeds.

When naming contingent beneficiaries, the most frequently asked questions are, “who should be the contingent beneficiary?” and “can a child be a contingent beneficiary?”

To answer both of these questions, a contingent beneficiary can be anyone you want. People usually name dependants as beneficiaries so that they are taken care of after you die. However, if you do not have any dependents, you can also name immediate family members or close friends, organizations, estates, charities or trusts as your beneficiaries.

Moreover, it is very common for people to name their spouses as their primary beneficiary and their children as the contingent beneficiary. So to answer the question, yes, children can be named contingent beneficiary which is usually the case in most life insurance policies. However, minor children or pets cannot qualify as they do not have the legal power to accept the assigned inheritance. So if your child is a minor, you will have to appoint a legal guardian to oversee the money until the minor reaches the legal age which is why people usually name their spouse as the primary beneficiary so that they can oversee the money until their children are of age.

You can also choose to list multiple contingent beneficiaries on your life insurance policy or retirement account. Each beneficiary will be paid a specific percentage of the money which will total to 100 percent. Contingent beneficiaries and primary beneficiaries receive the assets in the same manner that has been stated for the primary beneficiary. For example, if a primary beneficiary is stated to receive $1,000 per month for 10 years, a contingent beneficiary will also receive the payments in the same format.

After major life changes like marriage, birth, divorce or death, contingent beneficiaries need to be reviewed and updated. It is unlikely that the beneficiary you named years ago would still be named your beneficiary when you die. You could not be close to that person anymore or you might have other people depending on you more. Anything can happen which is why the contingent beneficiaries need to be updated in the event of a major life change.

Why Should a Contingent Beneficiary be Named?

By naming a contingent beneficiary for a life insurance policy or retirement account, you can avoid unnecessary time and expenses related to probate which is the legal process of distributing a deceased person’s assets when they have not left a will.

For example, Susan listed her children’s stepfather Alex as the primary beneficiary and as the contingent beneficiary, she listed her favourite charity. So even if Alex dies before her, her children will not be able to receive her inheritance as the contingent beneficiary is listed as the charity.

Contingencies can be created by a life insurance policyholder or retirement account owner that can prevent an inheritance without meeting certain qualifications. For example, an Individual Retirement Account (IRA) owner could attach a restriction that her daughter may only be able to inherit the money after she completes her education, when establishing her as the contingent beneficiary.

Furthermore, non-spousal beneficiaries are required to withdraw 100 percent of the IRA funds as per the passage of the SECURE Act in 2019. These funds should be drawn by the end of the 10th year after the IRA owner’s death.

Conclusion

Now that you know what is meant by contingent beneficiary, you can make an informed decision about who to leave either your inheritance or your life insurance death benefit to. You should keep in mind that your primary beneficiary is still the most important but it is also necessary to have a backup contingency plan in case your primary beneficiary predeceases you which is exactly what a contingent beneficiary is for.