Your life insurance policy is almost always not for you. It’s for those you care about most.
When you designate your loved ones as either a primary or contingent beneficiary, your life insurance financially safeguards them regardless of what life brings.
You will want to thoughtfully list your life insurance beneficiaries – the particulars matter.
No detail is too small.
Here, we’ll discuss all the details you need to know about contingent beneficiaries – what they are, why they are important and recommended steps to take for a contingent beneficiary designation.
Table of Contents
What does a contingent beneficiary mean on a life insurance policy?
Definition – A contingent beneficiary, or secondary beneficiary, is a recipient of the insured’s death benefit, should the primary beneficiary be unable or unwilling to accept the death benefit from a life insurance policy.
Put simply, contingent beneficiaries are second-in-line for life insurance proceeds.
Primary Beneficiary vs. Contingent Beneficiary
Let’s take a step back.
Life insurance policies include two types of beneficiaries: primary and contingent.
- A primary beneficiary is the recipient of a life insurance policy’s death benefit.
- A contingent beneficiary receives the death benefit only when the primary beneficiary does not.
Note – In the rare case that the primary and contingent beneficiaries cannot accept a death benefit, a tertiary beneficiary (third-in-line) is sometimes established on a life insurance policy.
No doubt, your life insurance policy is valuable. Where your death benefit goes, should you pass away, requires careful planning on your part.
So, if there is no contingent beneficiary in place, your life insurance proceeds may be at risk.
Let’s ponder some “what-ifs”:
Say you and your primary beneficiary pass away (at the same time) in a car accident, and you do not have a contingent beneficiary listed on your life insurance policy.
Or, say your primary beneficiary dies before you do, and there are no contingent beneficiaries.
In both of those cases, your life insurance proceeds would almost certainly go to your estate:
- Estates are not generally tax-advantageous.
- A number of factors affect the handling of your estate, including what state you live in, whether or not you have debt, and if you have a will.
- Your death benefit is now subject to estate taxes and debts, meaning your loved ones could miss out on thousands of dollars.
- The process of handling an estate is often lengthy. Consequently, your family may have to wait for a long time before accessing funds from your estate.
Again, careful planning is in order since the details matter.
There are seven common contingent beneficiary mistakes to avoid.
Your contingent beneficiary is a minor.
Be wary of listing a person under the age of majority as a beneficiary.
Typically, it’s not lawful to give a child a lump sum of money from life insurance. Instead, a legal guardian (or two guardians) can oversee funds as a requirement.
Proceeds often enter into a trust for minor children. Be sure to seek legal counsel.
Your contingent beneficiary receives government benefits.
Exercise caution when naming a beneficiary with special needs.
Financial gifts, like life insurance, often put government financial assistance in jeopardy.
Commonly, trusts protect eligibility for government financial assistance.
Your contingent beneficiary is your estate.
Remember, estates are not tax-friendly.
Your life insurance proceeds are subject to the probate process (and taxes) if they enter your estate.
Loved ones may miss out on thousands of dollars and precious time.
Your contingent beneficiary is your creditor.
Life insurance proceeds are typically not subject to creditors. In other words, your death benefit is almost always immune to credit card companies and other entities in which money is owed.
Your proceeds can stay in the hands of your loved ones if you skip listing a creditor as a contingent beneficiary.
Details are not provided.
Be sure to provide specific information about your contingent beneficiaries:
For an individual, include their full legal name and social security number (SSN).
For an organization, include their tax identification number (TIN) and full address.
Include specific conditions: percentage (%) or dollar amounts ($) for each contingent beneficiary.
You do not properly set up your policy.
Life insurance policies are (almost always) tax advantageous. However, use care when listing the different parties to your life insurance contract.
Known as the Goodman Triangle, if the policy owner, insured and beneficiaries are all different people, your life insurance proceeds could be subject to taxes.
Your contingent beneficiary doesn’t know about your policy.
Millions of dollars of life insurance proceeds go unclaimed every year.
Communicate to your beneficiaries about the policy and where to find it.
Note – If you intend to list someone besides your spouse as a life insurance beneficiary, and you live in a community property state, plan to get their consent in writing. Community property states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
As a general rule of thumb, you will want to choose beneficiaries who depend on you financially.
Consider some common examples of contingent beneficiaries:
Contingent beneficiaries are often parents. As an example, say you are married with minor children.
The contingent beneficiary is your parent while your spouse is your primary beneficiary. If you and your spouse pass away, your parent will become the caretaker of your children.
Trusts ensure the distribution of policy proceeds follow your specific wishes.
For instance, a trust can provide instructions for when (and how much) funds will be provided to your minor children when they reach specific ages or milestones. Seek legal counsel to establish a trust.
Charities can receive tax-advantaged financial gifts through life insurance.
If you have a favorite non-profit organization, such as your church, life insurance proceeds are an excellent way to direct funds to a charity.
Sometimes, it makes sense to have more than one contingent beneficiary.
Your life insurance needs are unique and your beneficiary designations will reflect your personal preferences.
To get a general idea, let’s look at a few examples of beneficiary designations:
|Trust for Minor Children||Contingent||100%|
|College Alma Mater||Tertiary||100%|
In order for your contingent beneficiary to have the right to your life insurance death benefit, a number of things must happen:
- A death claim is filed with the life insurance company.
- The life insurance company reviews and accepts the death claim.
- Your primary beneficiary is not able or is unwilling to accept the death benefit.
Some of the contingent beneficiary’s rights depend on the set up of your policy:
Revocable vs. Irrevocable Beneficiary
- A revocable beneficiary means the policy owner has the right to change a beneficiary designation without the consent of the existing beneficiary.
- An irrevocable beneficiary means the policy owner does not have the right to change a beneficiary designation unless there is consent from the existing beneficiary.
The Difference Between Per Stirpes And Per Capita
Per stirpes and per capita are legal terms that describe how beneficiaries (and potentially their descendants) receive funds.
- Per Stirpes, Latin for by the branch, means a beneficiary’s descendants receive the assigned death benefit amount, should your beneficiary predecease you. This way, members of the beneficiary’s family will still receive the death benefit amount originally intended for your beneficiary.
- Per Capita, Latin for by the head, means only living members listed as beneficiaries will receive an assigned death benefit amount. In other words, the living beneficiaries receive the deceased beneficiary’s share of the life insurance proceeds.
You will want your life insurance policy to reflect your current needs and wants.
Life changes and things happen. Don’t leave your life insurance policy sitting untouched in your file cabinet.
Change is constant.
Regularly revisit your life insurance policy. Adjust your beneficiary (primary and contingent) designations if it makes sense.
Common life changes that may prompt a beneficiary change include:
Your primary and contingent beneficiary choice is one of the most important decisions you will make regarding your life insurance policy.
Remember, the particulars matter in beneficiary designation, and no detail is too small.
To conclude, in order for your contingent beneficiary to reflect your wants and needs, be sure to:
- Understand the definitions surrounding contingent beneficiaries.
- Avoid common mistakes made when assigning your contingent beneficiary.
- Understand the types and rights of contingent beneficiaries.
- Regularly revisit your life insurance policy and update as desired.