What is a Contingent Beneficiary? And Why is it Important?

Whether it’s a life insurance policy, a personal savings account, or an employer-offered retirement account, designating a beneficiary is a way to ensure your assets are bequeathed or paid to who you’d like to have them. But, what happens if that beneficiary can’t or refuses to receive your assets and benefits? That’s where a contingent beneficiary saves the day.

What’s A Contingent Beneficiary? 

While your primary beneficiary is the person you name to receive your policy benefits upon death, a contingent beneficiary is a second person you list in the event your primary beneficiary can’t or won’t be able to accept it. There are many reasons for this situation- death, incapacity, inability to locate, ineligibility, or refusal. And, yes, all of the above happen more frequently than most people realize. 

The contingent is your plan B for the event that something goes wrong with the primary beneficiary. Yet, the contingent can’t jump ahead of your primary beneficiary unless your account manager identifies those circumstances and deems then valid. 

Do keep in mind that you’re also not limited to just naming one of each. Most policies allow the holder to name several primary and contingent beneficiaries, by which the assets would be divided first by primary co-beneficiaries and, if those can’t or won’t accept, then by the co-contingent beneficiaries. 

You’ll be able to decide how that division occurs by selecting percentages for each assigned beneficiary. For example, if you have four children, then you can name them all as 25% contingent beneficiaries behind a spouse as a 100% primary beneficiary. 

Selecting A Contingent Beneficiary 

You can name any person or entity as your contingent beneficiary so long as they’re legally able to accept your benefits. Your pet, for example, isn’t legally able to accept your estate. 

In most states, minor children are also unable to take possession of your assets immediately. They’ll likely need to be 18 or 21 before they can access it unless you name a legal guardian to accept and manage the money on their behalf until they come of age. 

Outside the norm of relatives, organizations and non-profits can be contingent beneficiaries. You’ll need to ensure your tax professional is involved to avoid challenges and penalties. 

Of course, you can change your designations at any time on most policies. The exception to that is certain types of locked trusts and irrevocable life insurance policies, in which your designations are unchanging. 

Updates to beneficiaries typically take place anytime there’s a significant life event – marriage, divorce, children becoming adults, deaths, and births. 

Importance Of Primary And Contingent Beneficiaries 

Now that you know what a contingent beneficiary is, there are a couple of points you should consider in making your designations. 

In many cases, it will be up to your beneficiary to claim the assets you’ve left them. Keep them in the loop as to what they are, what they should expect to get, and from who they need to see to get it. 

Your designation policies will legally override any contradicting instructions in your will. Naming a beneficiary on such accounts can be more beneficial than will designations because the latter often involves lengthy, costly, and cumbersome probate regulations. 

Final Thoughts

If there’s any question about naming contingent beneficiaries and divisions, then it’s always best to speak to your life insurance account manager to ensure legalities and designations are to your wishes. Don’t forget to know if destinations are permanent or changeable when opening new policies and to revisit amendable policies through life changes.

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