If you have recently drawn up your will or opened a new life insurance or retirement account, you’ve likely been asked to choose one or more beneficiaries. You may be familiar with the primary beneficiary, the person or organization that receives your policy’s benefits after your death. However, you may be less familiar with a contingent beneficiary, the person chosen to receive your insurance policy payout if the primary beneficiary has already passed away, refuses to accept the death benefit or can’t be located.

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What is a contingent beneficiary?

When you make a will, purchase a life insurance policy or open a retirement account, one of the first things you’ll be asked is who you’d like to name as your primary beneficiary. Your primary beneficiary is the person or persons who will receive the benefits of the policy or account when you die.

Your beneficiary doesn’t have to be a person — it can be an organization or charity. For example, you can name your college alma mater to receive your payout to endow a scholarship in your name.

A contingent beneficiary is the person or entity that will receive the benefits if the primary beneficiary has died, is unable to be located or, for whatever reason, refuses the payout. You could think of the contingent as the auxiliary, or backup, beneficiary — someone who benefits if the primary person cannot receive the benefits.

You can name multiple primary and contingent beneficiaries, and many people do. But the contingent beneficiaries will not receive the proceeds from your policy unless all of the primary beneficiaries are unavailable. If even one of the primary beneficiaries steps forward, the contingent beneficiaries do not receive the death benefit.

Primary vs contingent beneficiaries

When thinking through each type of beneficiary, it may help to think of the primary beneficiary as the first person who benefits from the will or policy. So if someone has a term life insurance policy for $100,000, and they pass away while the term is in effect, the person they designate as primary will receive $100,000 from the insurance company. If the primary beneficiary is unavailable, the contingent beneficiary would receive the $100,000 payout.

The beneficiaries — both primary and contingent — do not necessarily have to be individuals. Policyholders may choose for their death benefit to pay out to an organization such as an animal shelter, church, museum or university.

If you’d like to name multiple beneficiaries, you just have to state your beneficiary designations when you purchase the policy. A policyholder may choose to name their husband as the primary beneficiary and their two children as contingent beneficiaries, each receiving 50 percent of the payout. Keep in mind that the beneficiary structure may determine how likely a contingent beneficiary is to receive benefits. For example, someone could designate three primary beneficiaries and one contingent beneficiary for a life insurance policy on a per capita basis. In this scenario, if one beneficiary dies, the other two primary beneficiaries would split the payout evenly. The contingent beneficiary would only receive a payout if all three primary beneficiaries died or could not be located.

Any stipulations that were noted for the primary beneficiary also hold true for the contingent. So if the money were to be disbursed in one lump sum, this would also hold true for the contingent beneficiary.

How to choose a contingent beneficiary

Many financial professionals recommend naming your contingent beneficiary when you first write your will or purchase your policy. As long as your beneficiaries are revocable, you can always change beneficiary designations down the line. For instance, if you name your wife as your primary beneficiary and then get a divorce, you can replace her as a beneficiary.

You can name pretty much any person, persons, organization or business as a contingent beneficiary, but if you would like to name a minor as a beneficiary, there are additional factors you may have to consider. For a minor, you will likely need to stipulate that the money be placed in a trust until the minor becomes an adult and can claim it. Alternatively, you could name a trusted guardian as the custodian of the money until the minor becomes an adult.

Some factors you may want to consider when choosing your contingent beneficiaries are:

  • Whether you have dependents, and if so, who would care for them in the event of your death?
  • If you have dependents, are these individuals legal adults? How would your policy handle minor beneficiaries (primary or contingent)?
  • Who would be responsible for your financial commitments in the event of your death?
  • Beyond the people in your life, is there an organization you’d prefer to leave money behind for? If you and your primary beneficiary both pass at the same time, where would you like your benefits to go?

Do I need to choose a contingent beneficiary?

Since we can never be 100 percent sure that our situation when we die will be exactly the same as our situation when we purchased a policy, most financial professionals agree that it is a good idea to have a contingent beneficiary in mind, even if they are not the first person you’d like to receive the payout.

Naming that person (or charity or organization) may make the process of disbursing your estate much easier because your wishes are clearly stated. No one can fight over your insurance benefits if you have listed your primary and contingent beneficiaries and your intention for your payout is clear. If you’re unsure of how you would like to structure your beneficiaries, speaking with a licensed financial professional may help you work out how to designate your beneficiaries to achieve the financial outcome you wish after your passing.

What happens if I don’t name a contingent beneficiary?

If you have not named beneficiaries for your life insurance policy, your estate may get stuck in the probate process, which can eat away at the benefits because of legal and other fees. The clearer your intentions are before your death, the less likely your estate will typically be held up and cause distress and loss of income for your beneficiaries.

Frequently asked questions

    • Most financial professionals recommend naming at least one contingent beneficiary, even if you have multiple primary beneficiaries because circumstances can change in ways you could never have imagined. Speaking with a licensed financial professional could help you figure out who to name as a primary beneficiary and who to name as a contingent beneficiary.
    • The terms are often considered interchangeable. A contingent — or second — beneficiary will receive your policy’s benefits in the event your primary beneficiary has passed away, refuses the benefits or cannot be reached.
    • While you can name a child as your contingent beneficiary, they may not have direct or immediate access to the funds you leave behind. Be aware that if a beneficiary is a minor,  your policy may require funds to be held in trust until they are of age. Alternatively, your policy may require a court-appointed adult custodian to oversee the funds on that child’s behalf. If the beneficiary is a minor when they are named but are an adult when the policyholder dies, they should be able to receive the funds directly without the need for a trust or custodian.