What are contingent beneficiaries?

When you purchase life insurance, the real goal is to make sure your loved ones are financially protected after you’re gone. Choosing your primary beneficiary — the person who will receive the policy’s death benefit — is an essential part of that process. But here’s something that often gets overlooked: naming a contingent beneficiary. While it’s not required, it’s a smart move that ensures a backup plan is in place if the primary beneficiary can’t accept the payout. Think of it as an extra layer of security for your loved ones, helping to prevent any delays or complications down the road. By taking this extra step, you’re making sure your financial legacy reaches the right hands, no matter what.

What is a contingent beneficiary?

A contingent beneficiary, often called a secondary beneficiary, is a backup to your primary beneficiary in your life insurance policy. The contingent beneficiary comes into play only when the primary beneficiary can’t receive the death benefit. Understanding the contingent beneficiary meaning is important, as there are several scenarios where this might happen. So, if you’re still wondering what a contingent beneficiary is and when they would step in, here are some examples of situations where a contingent beneficiary would take over:

• If the primary beneficiary dies: The contingent beneficiary is next in line to receive the payout.
• If the primary beneficiary can’t be located: The contingent beneficiary would receive the benefit if the primary can’t be found after many efforts to locate them.
• If a divorce revokes the beneficiary’s rights: For example, if your ex-spouse was named as a primary beneficiary but a divorce legally revokes their rights, the contingent would step in.
• If the primary refuses the benefit: In rare cases where the primary beneficiary refuses the death benefit, the contingent is then eligible.
• If an organization is the primary but goes out of business: If you named a charity or nonprofit as the primary beneficiary and it ceases to exist, the contingent beneficiary would receive the death benefit instead.

Primary and contingent beneficiaries: What’s the difference?

When setting up life insurance, it’s important to understand the roles of primary and contingent beneficiaries. The primary beneficiary is the first in line to receive the policy’s death benefit. For example, if you have a $100,000 term life insurance policy and pass away during the term, the primary beneficiary will receive the payout. This is typically a spouse, adult child or another close family member, but it doesn’t have to be. Many people also choose to name charities, organizations or even trusts as their primary beneficiaries.

On the other hand, a contingent beneficiary is the backup — the person or entity who receives the death benefit if the primary beneficiary is unable to accept it. This could happen if the primary beneficiary passes away, can’t be located or is otherwise ineligible (like an ex-spouse in some cases). For instance, if you named your spouse as the primary beneficiary and your two children as contingent beneficiaries, the children would only receive the payout if your spouse is unable to.

You can also choose to have multiple primary or contingent beneficiaries and specify how the death benefit should be divided. For example, you could name three primary beneficiaries, such as siblings, each receiving a third of the payout. If one of them can’t accept the benefit, the other two would split it evenly, while the contingent beneficiary would only receive anything if none of the primary beneficiaries are able to claim it.

Ultimately, both primary and contingent beneficiaries can be individuals or organizations, and you typically have full control over how the funds are allocated between them.

How to choose a contingent beneficiary

Choosing a contingent beneficiary is an important part of ensuring that your life insurance benefits go where you intend, even if your primary beneficiary is unable to accept the payout. You can name any person, organization or business as a contingent beneficiary, providing flexibility for your specific wishes.

When selecting a contingent beneficiary, consider these factors:

• Dependents: Do you have dependents who would need financial support if something happens to you? It’s important to think about who would care for them and manage any financial responsibilities.
• Adults vs. minors: Naming adults as beneficiaries is straightforward, but if you want to name a minor, there are additional steps you should take, such as creating a trust or custodial account to manage the funds until they reach adulthood.
• Financial responsibilities: Consider who would be responsible for your financial obligations — such as debts, a mortgage or dependents — if your primary beneficiary cannot fulfill this role.
• Organizations: If you have charitable causes or organizations you care deeply about, you may want to consider naming them as contingent beneficiaries. This ensures that your money will still go to a meaningful cause if your primary beneficiary is unavailable.

Do I need to choose a contingent beneficiary?

Choosing a contingent beneficiary might seem like an optional step, but it’s actually a smart way to safeguard your life insurance payout. While your primary beneficiary is first in line, life can throw unexpected surprises. If they pass away before you or can’t accept the payout for any reason, having a contingent beneficiary ensures your policy still benefits someone you care about.

It’s especially important to have a contingent beneficiary in place if your policy pays out in installments rather than a lump sum. If the primary beneficiary passes away mid-payout, the contingent beneficiary would step in to receive the remaining funds.

Think of it as building an extra layer of protection for your loved ones. By naming a contingent beneficiary, you’re helping ensure the money goes exactly where you want without leaving any room for confusion or disputes.

What happens if your primary beneficiary is deceased and you have no contingent beneficiaries?

If your primary beneficiary passes away and you haven’t named a contingent beneficiary, your life insurance payout may end up in a place you never intended: your estate. At first glance, that might not seem like a big deal, but it can lead to complications that could drastically reduce the money your loved ones actually receive.

When life insurance proceeds are paid into an estate, they have to go through probate — a slow, sometimes messy process that takes months or even years to complete. Before your heirs see a dime, the estate must settle administrative fees, taxes and any outstanding debts. In some cases, adding life insurance proceeds to your estate could push its value over federal or state estate tax exemptions, potentially creating a hefty tax bill.

And that’s not all. Probate can be a breeding ground for family disputes, as different heirs may disagree on how the remaining funds should be divided. What’s left after probate might be far less than you intended, and the emotional toll on your loved ones can be even greater. To understand the importance of having contingent beneficiaries, let’s look at a real-life scenario.

This Reddit user is grieving and clearly frustrated with the claims process for their parents’ life insurance policies. However, this user doesn’t realize that the payout issues are not the result of the insurance companies not playing nice.

Their parents had life insurance policies with six different insurers, and they were each other’s beneficiaries. Because they are both deceased and the policies clearly didn’t have any contingent beneficiaries named, it appears that the death benefits were paid to their estates. Unfortunately, life insurance death benefits paid to the estate can bring undesirable consequences.

This Reddit user is dealing with the probate process and court systems. Probate can take months or even years to be settled. The user accuses the insurers of trying to steal the money when, in reality, it’s end-of-life expenses, court fees, taxes and creditors that are likely eating away at the estate value.

Naming a contingent beneficiary is a simple yet powerful way to prevent scenarios like this. By ensuring the death benefit bypasses your estate, you not only avoid unnecessary taxes and delays but also make sure the people you care about most are taken care of, just as you intended.

Frequently asked questions

• Do I need to name a contingent beneficiary if I have multiple primary beneficiaries?

  Most financial professionals recommend naming at least one contingent beneficiary — even if you have multiple primary beneficiaries — because circumstances can change in ways you can’t predict.

• What is the difference between a contingent beneficiary and a second 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.

• Can I change my contingent beneficiary?

  Yes, you can typically change your contingent beneficiary at any time. There are a few exceptions, such as irrevocable beneficiary designations and some community-property state laws.

  Life changes such as marriage, the birth of a child, divorce or the passing of a loved one are all good reasons to review your life insurance policy and update your beneficiary designations. Regularly reviewing your policy ensures that your current wishes are reflected and that the right people will receive the benefits when the time comes. This way, you can make sure your contingent beneficiary is always someone you trust to take care of your loved ones or any other financial obligations you may want covered after your passing.

  Staying proactive and revisiting your policy, especially after significant life events, is key to keeping your plan up to date and aligned with your goals.

• Who should be a contingent beneficiary?

  A contingent beneficiary should be a person you trust to use your life insurance benefits appropriately, such as using it to cover your funeral expenses. Most contingent beneficiaries are family members. If you want to leave your money to a minor, that’s okay, but the money will be held in a trust until they are old enough to claim it.

• What is the best life insurance company?

  The best life insurance company for one person may not be the best for another. Life insurers evaluate risk factors differently, so, for example, if you have a pre-existing condition, one insurer may offer you a better rate than another based on their underwriting guidelines. Not all insurance companies offer the same products either. If you’re looking for a whole life insurance policy, for instance, you may have to shop around since not all life insurance companies have whole life in their product lineup. Getting quotes from multiple life insurance providers can help you find the best insurance company for you.