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What is a Contingent Beneficiary: A Comprehensive Guide!

What is a Contingent Beneficiary?

If you have a will, policy, or trust, it’s essential to name a primary heir as well as a secondary or contingent beneficiary. This is a backup plan – someone who will receive your estate if the original heir isn’t able to inherit, for instance, if the primary beneficiary is not alive, can’t be found, or decide to turn down the inheritance. Having a contingent beneficiary ensures that your wishes are respected in such a situation. Estate Planning can be complicated, but it is not hard to set up. Once you understand the process, it will give you peace of mind. Creating a Will and correctly choosing your primary and contingent beneficiary should be your priority.

Designating who you’d like to receive some or all of your estate after you pass away is essential to Estate Planning. This post will explain what a contingent beneficiary is and why it is as important as the primary. So let’s dive in!

Why is It Important to Name a Contingent Beneficiary?

Naming a contingent beneficiary is an excellent way to ensure that your inheritance, such as assets and life insurance benefits, will be transferred to someone or some entity of your choice, even if your main or primary beneficiary can no longer receive them.

For instance, if you and your primary beneficiary pass away at the same time, the contingent beneficiary or beneficiaries would be the ones to receive your estate. This is why it’s often a good idea for married couples to name their children as contingent beneficiaries.

How to Decide Upon Who Will Be Your Contingent Beneficiary?

Generally, it is essential to have an overview of someone’s financial circumstances when selecting a primary and contingent beneficiary. The death benefit is typically directed to the person most likely to be affected financially by your death.

This is usually the person responsible for organizing and paying for the funeral, such as your spouse or kids. However, deciding who should be the primary and who should be the secondary beneficiary can be difficult. Additionally, legal stipulations add another layer of complexity. For instance:-

Naming Spouse as Contingent Beneficiary

Generally, a spouse is a primary beneficiary. However, it’s allowed if someone wants another person as the primary and a spouse as a contingent beneficiary. But not in all cases – for instance, court orders like divorce decrees may require that a spouse or former spouse be listed as primary. Also, in the following nine community property states, the spouse has to be primary, so they cannot be named as a contingent beneficiary:

  1. Arizona
  2. California
  3. Idaho
  4. Louisiana
  5. Nevada
  6. New Mexico
  7. Texas
  8. Washington
  9. Wisconsin

Naming Minor Children as Contingent Beneficiaries –

Minor children can be appointed primary or contingent beneficiaries. But they cannot directly receive death benefits until they become adults. But if you pass away before the children have come of age, a legal guardian will be responsible for determining how the money is used. The state will appoint one if no one is designated as the minor’s legal guardian.

Primary vs. Contingent Beneficiary

The difference between the primary and contingent beneficiary is the order in which they are considered to inherit your estate. Individuals or entities intended to be the primary recipients of your inheritance and death benefits are the primary beneficiaries.

And as explained earlier, the contingent beneficiaries are backups if something happens to the primary beneficiaries. You can also assign tertiary beneficiaries who can claim the death benefit if the primary and contingent beneficiaries have passed away.

Under What Circumstances Can a Contingent Beneficiary Claim Death Benefits?

Death benefits are financial payments or benefits paid to the family or beneficiaries of a deceased person. These payments usually come from the deceased’s life insurance policy or sometimes from an employer’s pension plan.

In most cases, the contingent beneficiary will not receive the death benefit unless the primary beneficiary has passed away. However, there are a few exceptions like the following:

  • No Trace of the Primary Beneficiary
    If the main person named to receive the insurance proceeds cannot be located, the money will go to the next person in line.
  • The Primary Beneficiary is Alive but Disabled
    If the primary beneficiary is alive but unable to make decisions due to physical or mental incapacity, the contingent beneficiary may take the primary position. This is a difficult situation and may need to be resolved in court, depending on the level of incapacity and other considerations.
  • Primary Beneficiary Declines Death Benefit
    It doesn’t make a difference what the primary’s motivation is for denying the death benefit – if they do, the funds will go to the contingent beneficiary.
  • The Primary Beneficiary is Accountable for the Policyholder’s Demise
    The Slayer Rules state that if the primary beneficiary is responsible for the death of the policyholder, they are not allowed to benefit from the life insurance policy.
  • The Primary Beneficiary is in Prison
    Suppose the main beneficiary is serving a sentence at a state or federal prison. In that case, they could be deprived of their right to any life insurance policies in which they are named the primary beneficiary. This will depend on the state and the crime for which the person is incarcerated. In some cases, they may be denied their claim to the funds, and in other cases, the death benefits may be used to reimburse the victims.

Hopefully, this article has addressed your concerns about primary and contingent beneficiaries.

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What happens if there is no contingent beneficiary?

Suppose you don’t name a secondary beneficiary, and for some reason, your primary beneficiary can’t accept the inheritance. In such a case, you will increase the risk of the death benefit going to your estate, which can lead to estate taxes. This will likely also cause a delay in distribution. So, it’s best to make sure you name a contingent beneficiary.

Can the same person be your primary and contingent beneficiary?

Ah! The classic estate planning error! The contingent beneficiary is your plan B. You need a separate primary heir who can inherit your estate in the first place.

How many beneficiaries can you have?

No hard and fast rule exists for how many beneficiaries you should have, though certain policies or accounts may limit the number of beneficiaries you can have.

Can a child be a contingent beneficiary?

Yes. It is indeed common to have a spouse as the primary and a child as the contingent beneficiary. However, a guardian will take care of the assets till the child becomes an adult.

If you are still confused, it’s recommended that you speak to a financial expert. Call Rick now!