Life insurance policies have many benefits. One of the most important of these benefits is the death benefit. It’s important to give financial stability to your loved ones should you pass away unexpectedly. This is why when you purchase a policy, you’ll also want to select a beneficiary for your policy. You can choose people, entities and organizations to be the beneficiary of your policy. But supposing your beneficiary has also passed on, cannot be found, or declines your death benefit, what will happen?
To avoid lengthy legal processes and/or your death benefit reverting to your estate (and hence to probate), you should be sure to name a contingent beneficiary or contingent beneficiaries in addition to your primary beneficiary. This will ensure your death benefit will be left to those you intended, without winding up in your estate.
What is a contingent beneficiary? A contingent beneficiary is a person(s), organization, trust, or other entity named by the policyholder to receive their life insurance death benefit if the primary beneficiary is deceased, unable to be found, legally unqualified to accept it, or refuses the benefit at the time the monies are to be paid out. Contingent beneficiaries are second in line to receive the life insurance death benefit.
A primary beneficiary is the first person or entity to inherit the death benefit. Many people choose their spouse, children, or siblings to be their primary beneficiaries. Let’s say you have a $100,000 death benefit and you name your spouse the primary beneficiary and your 18-year-old child the contingent beneficiary. Your spouse would get 100% of the death benefit should you pass away. However, if your spouse has also passed on, then 100% of the death benefit would go to your child.
Another aspect of beneficiaries that you should keep in mind when appointing them, is you are not limited to only one primary beneficiary and one contingent beneficiary. You’re allowed to have multiple beneficiaries of each kind. If you choose to have multiple beneficiaries, you can allocate percentages for each beneficiary, specifying exactly what each beneficiary should receive or inherit from the policy. Let’s go back to the $100,000 death benefit example. Instead of having your child as the only contingent beneficiary, you have your child and your niece as contingent beneficiaries with each allocated 50%. Then, if your spouse is unable to receive the death benefit as the primary beneficiary, the death benefit would be split 50/50 between your child and your niece.
A good way to think about primary vs. contingent beneficiaries is first vs. second beneficiaries. The second or “contingent” beneficiary can collect the benefits only if the first or “primary” beneficiary cannot.
As with anything in life, it’s always good to have a back-up plan. Naming primary AND contingent beneficiaries will ensure that your death benefit will be left as you intended, while also making it easier for your family. Naming both primary and secondary beneficiaries will make your intentions clear.
When choosing beneficiaries, both primary and contingent, it’s important to keep in mind they must be able to legally accept your death benefit. For example, if you name your child as a primary or contingent beneficiary, they will only be able to accept the death benefit if they are at least 18 years of age. If they are under the age of 18, you will want to make sure you have a custodian, legal guardian, or a trust selected which will hold the funds until your child comes of age.
Common contingent beneficiaries include:
After purchasing a life insurance policy, you’ll have the option to name primary and contingent beneficiaries on the designated form. You’ll want to be sure you submit the following information about your chosen beneficiaries in order to assure a smooth transition of funds when you pass.
Keep in mind you can change who is designated as your beneficiaries, both primary and contingent even after you own the policy.
At McFie Insurance, we can help you set up your life insurance beneficiaries, make changes or updates to your primary and contingent beneficiaries, and answer any questions you may have about the process. Call or email us today. We’ll take care of you.