If you have recently drawn up your will or opened a new life insurance or retirement account, you’ll be asked to choose one or more beneficiaries. You may be familiar with the primary beneficiary, which is the person or organization that receives your policy’s benefits after your death. However, there are multiple types of beneficiaries.

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A contingent beneficiary is a person chosen by the policyholder to receive their insurance policy payout if the primary beneficiary has already passed away, refuses to accept the death benefit or can’t be located.

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 $100,00 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 merely 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% of the payout.

Any stipulations that were noted for the primary beneficiary also hold true for the contingent. So if the money was to be disbursed in one lump sum, this would hold true for the contingent beneficiary as well. If, on the other hand, the money was to be distributed to the primary beneficiary over a period of several years, that, too, would be how the contingent beneficiary would receive their payout.

Choosing a contingent beneficiary

It is important to name your contingent beneficiary when you first write your will or purchase your policy. 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.

The only legal options you don’t have for contingent beneficiaries are: you cannot name a minor child and you cannot name a pet. In both cases, you would instead have to name a guardian as the beneficiary, who would then be responsible for ensuring that the child or pet received the appropriate care.

For a child, the money would be held in trust until they are of legal age. For a pet, the guardian could use the money to give the animal the level of care that the policyholder would have wanted.

Why choosing a contingent beneficiary is important

Since we can never be 100% sure that our situation when we die will be exactly the same as our situation when we purchased a policy, it is a good idea to have a contingent beneficiary in mind even if they are not the first person we’d like to see 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 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 be held up and cause distress and loss of income for your beneficiaries.

Frequently asked questions

I want to name one of my children as primary and the other as contingent beneficiary of my life insurance policy. Is this allowed?

As long as you have the written, legal documents stating your preference clearly, there should be no problem with this. A good recommendation, however, might be to share this information with both children while you can. That way they will understand your reasoning and indicate their acceptance of your wishes.

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

It is a good idea to do so, because circumstances can change in ways you could never have imagined. If you have two primary beneficiaries, and one dies, the other would inherit the whole policy. But if both die before you, a contingent beneficiary would stand to gain the entire payout.

If my primary beneficiary is alive and accepts the payout of benefits, does the contingent beneficiary receive anything?

No. The contingent beneficiary receives a payout only if the primary beneficiary (or beneficiaries) have died, cannot be found or refuse the benefit.

Does my contingent beneficiary have to be a family member?

No, it is entirely up to you to name whomever you want (except a child or pet). Your primary and contingent beneficiaries can be family friends, someone you would like to help or an organization or charity you support.

What is the process of a death benefit being dispersed?

First, the policyholder’s beneficiaries will likely have to notify their insurance company of the policyholder’s death and present a death certificate. They’ll also have to turn in relevant policy documents and a claim form. An insurance agent will be able to explain exactly what documents are needed. If the primary beneficiaries are still living and can be found, the policyholder’s death benefit will pay out to them once the claim is verified and processed. If not, the contingent beneficiary will receive the payout.