What Is A Contingent Beneficiary?

Often, questions about life insurance applications are brought up by many people. Questions like What Is A Contingent Beneficiary? That’s because there are a lot of steps involved in getting one approved, and much of the process is not required by law.

For most people, the question of who they want to inherit their estate is a long and confusing one. It is also a difficult series of questions to answer. But this question is even more complex when you are trying to determine who will be your beneficiary if you purchase life insurance.

Once you have selected the life insurance policy that is correct for your needs, the application process will begin. Finally, you will get to the part where you must name your contingent beneficiary. This is an important decision that can make or break your life insurance claim. If you don’t choose the right person (or company), it could lead to legal problems.

This article will define what a contingent beneficiary is, the functions they serve, and considerations when naming someone as your contingent beneficiary.

Not all life insurance companies offer contingent beneficiaries, so you need to check with your provider to see if it is an option available to you!

Definition of ‘Contingent Beneficiary’

An insurance beneficiary is a person who would receive a payout from your policy if you were to pass away. Payments can be used for various expenses, including end-of-life expenses and day-to-day expenses like mortgages and child care, among others.

Contingency beneficiaries are like your “alternate” beneficiaries. You can change the beneficiary designation on most policies at any time.

If the primary beneficiary dies simultaneously as the insured, the contingent beneficiary will receive proceeds from an insurance policy or annuity.

It may be beneficial for some to designate two primary beneficiaries – a spouse or partner and a parent – especially if both are at risk of financial hardship. Many others feel it makes the most sense to name one primary beneficiary and a contingent beneficiary. 

Having more than one primary and contingent beneficiary is possible. All you need to do is designate what percentage of your life insurance proceeds they should get to each beneficiary. 

In certain policies, for example, beneficiaries can include up to ten primary beneficiaries and ten contingent beneficiaries. The total percentage allocated must equal 100%, regardless of how many primary beneficiaries you have. It is up to you to decide how to divide that 100%.

How Contingent Beneficiary Assignment Works

There is virtually no limit to how many conditions a contingent beneficiary can be subject to; it completely depends on the individual who drafts the will. The contingent beneficiary will not receive anything if the primary beneficiary accepts the inheritance. 

For example, suppose Sarah names her husband Harry as the primary beneficiary of her life insurance policy and her two children as contingent beneficiaries. When Sarah dies, Harry is paid out by her insurance company while the kids receive nothing. In the event that Harry predeceases Sarah, each of their children receives half of the proceeds.

Characteristics of Contingent Beneficiaries

• A contingent beneficiary may be an individual, an organization, an estate, a charity, or a trust. A minor child or pet cannot be assigned assets because they do not have legal authority for that purpose. 
• An appointed guardian oversees the money until a minor reaches legal age if he or she is listed as a contingent beneficiary. While close friends and other relatives are also frequently listed as contingent beneficiaries, immediate family members are most common.
• Contingent beneficiaries must be reviewed and updated after major life changes like marriage, divorce, birth, or death.
• The proceeds from the policy go to the nearest relative of the insured if there is no contingent beneficiary. A court will often award benefits to the innocent contingent beneficiary or the insured’s estate when the primary beneficiary kills the insured intentionally and unlawfully.

The Mistake Of Out-Of-Date Beneficiary Designations

Many people still have deceased spouses or relatives listed as beneficiaries on their retirement account at a former employer or on a long-term care policy. So when taking a look at this number, it’s essential to bring up the question, when was the last time you checked your beneficiary designations?

Therefore, it is important that account-holders check and, if necessary, update beneficiary statements after marriage, divorce, birth, death, and other major life events.

Investors and savers make this mistake frequently and it can be very costly. This common scenario is better described on the following link!

According to Ed Slott, a certified public accountant in Rockville Centre, New York, the worst-case scenario is that you get divorced. Your ex-wife is named as beneficiary, and you never change the beneficiary designation.

In terms of distributing assets after death, beneficiary forms are a mountain to climb.

According to Lynn Ballou, regional director of EP Wealth Advisors and certified financial planner, whatever your beneficiary statement states trumps your estate plan. This document dictates how assets will be distributed after death.

In a Supreme Court case of 2009, a dying man’s daughter claimed his retirement plan funds should go to her instead of his long-divorced wife. Despite the ex-wife having waived her claim during the divorce, the court ruled unanimously that all the funds were hers because her name was not removed as sole beneficiary.

Causes Of Beneficiary Oversights

As well as assuming a will overrides a beneficiary form, many people do not check or change beneficiary forms because they believe it is the responsibility of plan administrators or custodians. In fact, the plan documents may list the spouse or dependent as beneficiary already. CFP Katherine Simmonds, an advisor at AdvicePeriod, warns that custodians can make mistakes.

How To Check And Change Beneficiaries

Some retirement accounts allow beneficiaries to be changed or checked online. For others, account holders must ask the administrator or custodian for the necessary documentation.

However, beneficiaries can become more complicated. Alternatively, people can leave funds to a trust or charity, naming multiple primary or contingent beneficiaries. Some states require the spouse’s written permission before naming anyone else as the primary beneficiary.

Beneficiary Complexity

As well as traditional Roth, SIMPLE, and SEP IRAs, beneficiaries may also have 401(k) plans, 403(b) plans, and deferred compensation employer plans, life insurance policies, 529 plans, and accounts designated as “Transfer on Death.”

There are risks, limits, and costs associated with naming beneficiaries. For example, one potential mistake is naming a minor child or other incompetent people. Giving money to a high-income person who is then pushed into an even higher tax bracket could also be a problem.

In some cases, the process can be cumbersome when administrators and spouses need to sign off. In addition, getting input from a tax accountant, a tax attorney, or a financial advisor can be expensive. Experts say, however, that it is fundamental to an effective estate plan.

Ballou at EP Wealth Advisors says people get intimidated by the forms and believe they have no choices or power. In fact, you own it, you should decide whom it should go to, and you are able to make that decision.

How To Choose A Contingent Beneficiary?

A child or a person designated as the legal guardian of your children is a common choice for many families. A close family member or friend could be a suitable option if you don’t have children. 

In the event that you have more than one child, you may choose to allocate a different percentage of the benefits to each child.

As for the question of whether you can name a charitable organization as the beneficiary: Of course you can.

Common Mistakes People Make When Picking A Contingent Beneficiary

Often, people list children who they consider minors, in which case they are also required to name a custodian. Even though it may seem surprising, many people mistake naming the custodian as the primary beneficiary. Having a deceased custodian in the first instance would not make this an appropriate arrangement.

Benefits of Naming Contingent Beneficiaries

Unexpected things happen in life. Contingency beneficiaries are a prudent way to protect your loved ones from a diverse range of “what-if” situations, such as the possibility that your primary beneficiary is no longer alive when a claim is filed.

You may also want a contingent beneficiary listed so the death benefit proceeds do not become payable to the insured’s estate, where they might be subject to estate taxes and delayed distributions. If you have already established a living trust or a will, this might not be an issue for you.

Including a contingent beneficiary on a life insurance policy or retirement account can save one’s family time and money during the probate process. When a person dies without leaving a will, probate is the legal process of distributing their assets.

Those with life insurance policies or retirement accounts can create contingencies that prevent inheritances without meeting certain requirements. An IRA owner could, for example, designate their child as the contingent beneficiary and specify that the money may not be transferred to the child until after he or she has completed college.

And finally, the SECURE Act, which went into effect in 2019, requires non-spouse beneficiaries to withdraw 100% of the IRA funds by the end of the 10th year following the IRA owner’s death.