A contingent beneficiary is a person, estate or trust that receives the assets of a person who dies if the primary beneficiary, for any reason, cannot receive the assets.
It is commonly recommended by attorneys when their clients are making a will to have at least one contingent beneficiary.
It is possible to have several contingent beneficiaries and they can be listed in a specified order.
After a person dies, his or her assets will usually go through probate. The probate process can be avoided and the assets more efficiently passed to the heirs if primary and contingent beneficiaries are named.
While the contingent beneficiary is one of the most important factors of the life insurance policy process, it’s typically one of the most confused and misunderstood. Any mistakes or misunderstandings can lead to a lot of problems down the road that can cause major headaches for your loved ones.
Why It’s Important To Name Contingent Beneficiary
Beneficiaries take precedence over wills. If a beneficiary is assigned to a bank account, that beneficiary has the rights to that account after the owner’s death even if the will states the assets in that account should go to someone else.
Contingent beneficiaries can also be assigned to retirement plans, annuities, and life insurance policies. There will be one person as the primary beneficiary on the policy. This is usually a spouse or partner. They receive the proceeds from the policy upon the death of the policyholder. If a contingent beneficiary is named such as a child or other family member or friend of the deceased and the primary beneficiary cannot receive the proceeds, it will pass to the person next in line.
Electing a contingent beneficiary in wills as well as in insurance policies is a simple way of making sure the surviving loved ones are cared for if the primary beneficiary is incapable of doing so. It is also a way to donate to a special cause or charity after the death of the policyholder. The disposition of assets is not complicated by unforeseen events such as the death of the prime beneficiary.
For example, if a will gives all the deceased’s assets to the spouse as the prime beneficiary, but the spouse is incapable of managing the assets, they can be given to the contingent beneficiary, who may be an adult child, on the condition that the child cares for the spouse during their lifetime. After the spouse dies, the assets can go to the child.
Circumstance Where A Second Beneficiary Makes Sense
There may be circumstances or stipulations that must be met before a contingent beneficiary may inherit the assets. The contingent beneficiary may need to finish college, reach a certain age or kick a drug habit, and only then they will receive the assets.
A policyholder and their primary beneficiary may die at the same time. This could happen in a car accident or natural disaster. If a contingent beneficiary has been named, the transfer of assets will be easier. The next in line is usually someone who is financially dependent on the policyholder, but if there is no one dependent, the contingent beneficiary can be anyone else or a charity or cause. It is not advised to make the estate the contingent beneficiary of an inexpensive life insurance policy because the proceeds would be subject to the deceased’s creditors. Life insurance proceeds paid to a person are not usually subject to creditors.
If the primary beneficiary is the spouse, the contingent beneficiary may be a minor child. Consideration needs to be given as to who will manage the assets until the child reaches 18 or 21 years.
It is recommended to assign two guardians for the children including one guardian to manage the money and one guardian to look after the well-being of the child.
In policies from some of the best term life insurance companies, a person can assign a primary beneficiary, a contingent beneficiary and a tertiary beneficiary. This is another kind of contingent beneficiary and only receives assets or proceeds from the estate or insurance company if all the primary and contingent beneficiaries are unqualified to receive the benefits or are deceased.
When a contingent beneficiary wants to claim assets, they need to provide a certified death certificate for the prime beneficiary and any other contingent beneficiaries that precede them on the list of succession as well as valid personal identification.
Each insurance company might require different documentation depending on their standards. When you name a secondary beneficiary, you need to ask what the requirements are going to be.
Consequences For Not Naming Beneficiaries
Insurance proceeds could be subject to huge estate taxes if the policyholder names the spouse as sole beneficiary and there is no contingent beneficiary. If the insured outlives his or her spouse, by a few days if they are both in a car accident, the proceeds will pass to the estate incurring huge unnecessary taxes.
If you don’t name a beneficiary, your other family members or loved ones can lose thousands and thousands of dollars because of the taxes that are going to be placed on the payout from the policy.
The other problem is that your loved ones could struggle to actually get their hands on the money itself. Without naming a contingency, the company is going to have to determine who the money should go to, depending on your family situation, this could cause a lot of problems and delays.
A contingent beneficiary is a safety feature and a control device. It is the most practical way to control the future distribution of wealth. It’s a simple thing today, but not something that should be decided on lightly. You should spend a lot of time determining who your beneficiary should be.
It’s also something that you should continue to maintain. There are dozens of different life changes that could impact who you would want to name as your beneficiary, which means that once you’ve named the primary beneficiary, it could change years down the road. Don’t forget to look back at your policy and ensure that the beneficiary is still the valid recipient and the best choice for the policy payout.
Life insurance is the most important investment that you’ll ever make for your family and loved ones. You may ask yourself at what age should I get life insurance policy, of course, we recommend the younger the better because the more you age the more risk you are to having health problems, which will increase your premium rates. Purchasing life insurance at age 20 versus purchasing life insurance over the age of 50. Tomorrow is not the day to start your life insurance application. Begin the process today!
Contingent Beneficiary Review
Time for the pop quiz! Hopefully, you know exactly what a contingent beneficiary is at this point. Not only should you know what it is, but hopefully you understand why YOU should name one.
Want to know more about life insurance or naming a contingent beneficiary, please contact one of our agents today. We are ready to answer those questions and ensure that you’ve got the best life insurance to fit your needs.
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