When you are deciding who gets the payout when you pass away, think of a contingent beneficiary as Plan B. If the primary beneficiary can’t or won’t take the payout, the contingent beneficiary gets the money instead. Thus you still have control over who gets the life insurance proceeds. You can name anyone as your contingent beneficiary. It could be a family member, friends, business partners, or non-profit charitable organizations. If your contingent beneficiaries are minors and cannot receive funds, you have to designate a guardian or legal trust.
Just as you can name co-beneficiaries, you can also name co-contingent beneficiaries. Each of them will receive whatever percentage of the payout you designate if the primary beneficiary is not available. If you name two contingent beneficiaries but don’t name percentages, the death benefit will be equally shared between them.
Why is it Necessary to Name Contingent Beneficiary?
- Your primary beneficiary may predecease you, start a successful business or go completely off the grid. That’s where the contingent beneficiary designation comes into play. This avoids your payout going into a complicated and expensive legal process in probate court, by which your assets are distributed in the absence of a will.
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Beneficiaries take precedence over wills.
- If a beneficiary is assigned to a bank account, that beneficiary has the rights to that account after the owner’s death. This is so even if the will states that the assets in that account should go to someone else.
- A Contingent beneficiary can also be assigned to retirement plans, annuities, and life insurance policies. The beneficiary receives the proceeds from the policy upon the death of the policyholder. If the primary inheritor cannot receive the proceeds and the contingent also can’t receive it, then, it will pass to the next person in line. Naming a contingent beneficiary in wills as well as in insurance policies ensures the loved ones are cared for if the primary beneficiary is incapable of doing so.
- It is also a way to donate to a special cause or charity after the death of the policyholder. The primary recipient’s death will not complicate the disposition of assets.
- The contingent beneficiary can have the assets where the spouse can’t manage the asset. This contingent beneficiary may be an adult child. The child can have the assets on the condition that the child cares for the spouse during their lifetime. After the spouse dies, the assets can go to the child.
You can always change your beneficiary designation if the person you named dies or outgrows the need for the fund. But the contingent beneficiary ensures that someone of your choosing gets the money in case you haven’t had time to change the primary beneficiaries.
Is the contingent beneficiary guaranteed to get some portion of the payout?
The contingent beneficiary gets the death benefit only if your primary beneficiary can’t or won’t take the payout.
A contingent beneficiary is not a partial heir. They won’t get the death benefit if the primary beneficiary is able to receive the payout, and accepts it. If you want to make sure a person receives part of the death benefit, you have to name that person as a primary beneficiary and decide how much of the death benefit you want them to receive.
What happens if I change my mind about who should get the payout?
It’s a good idea to review your choices periodically. Plus it’s no trouble to change your beneficiaries. You might want to revisit the contingent beneficiary. You can also revise the percentage funds that person would receive in case of your death.
For instance, if you remarry or if your children become super successful, you can easily reassign the death benefit to a new spouse. You can also reassign it to another family member who would benefit from the influx of cash. If you’ve assigned it to a charitable organization or company, you’ll want to find another recipient if they go out of operation.
Circumstance Where a Second Beneficiary Will Be Useful
The contingent beneficiary must satisfy some conditions before he will be able to inherit the assets. The contingent beneficiary may need to finish college or reach a certain age. They may have to kick a drug habit, and only then they will receive the assets.
A policyholder and their primary heir may die at the same time in an accident or natural disaster. transfer of assets will be easier if a contingent beneficiary has been named.
What do I need to name a contingent beneficiary?
You will need all relevant identifying information to name a contingent beneficiary: full name, address, and date of birth. This ensures that there is no confusion about whom you have named to receive the insurance proceeds. If none of your beneficiaries can be located, the insurance payout goes into your estate.
However it is not advisable to make an estate the contingent beneficiary of an inexpensive life insurance policy. This is because the proceeds would be subject to the deceased’s creditors. Life insurance proceeds paid to an individual are not usually subject to creditors.
If the primary recipient is the spouse, the contingent beneficiary may be a minor child. A guardian who will manage the assets should be appointed until the child attains 18 or 21 years. Two guardians should be assigned for the children. One guardian to manage the money and one guardian to look after the well-being of the child.
In policies from some of the best term life insurance companies, a person can assign a primary beneficiary, a contingent beneficiary, and a tertiary beneficiary. A tertiary beneficiary is another kind of contingent beneficiary. The tertiary beneficiary only receive proceeds from the estate or insurance company if all the primary and contingent beneficiaries are unqualified to receive the benefits or are deceased.
When a beneficiary wants to claim assets, they need to provide a certified death certificate for the prime heir. They also have to provide similar certificates for any other contingent beneficiaries that precede them on the list of succession. They equally have to provide valid personal identification. Each insurance company might require different documentation depending on their standards. When you name a secondary beneficiary, you should inquire as to what the requirements are going to be.
Are there consequences For Not Naming Contingent Beneficiaries?
There are a few consequences for not naming beneficiaries.
Insurance proceeds could be subject to huge estate taxes
Where a person named their spouse as the sole recipient without contingent beneficiary, insurance proceeds could be subject to huge estate taxes. For instance, where the insured outlives the spouse by few days if they are both in a car accident. In such circumstance, the proceeds will pass to the estate incurring huge unnecessary taxes.
If a beneficiary is not names, your loved ones could lose thousands of dollars. This is because of the taxes that are going to be placed on the payout from the policy.
Your loved ones may have to struggle to inherit the money you left them
Another problem is that your loved ones may have to struggle to actually get their hands on the money itself. When you don’t name a contingent beneficiary,, the company is going to have to determine who should inherit the money. This will of course depend on your family situation and could cause a lot of problems and delays.
Always Name a Contingent Beneficiary
A contingent beneficiary is the most practical way to control the future distribution of wealth. It is a safety feature and a control device. It’s also something that you should continue to maintain. There are so many different life changes that could impact on who you would want to name as your beneficiary. This means that after you’ve named the primary beneficiary, it could change years later. Don’t forget to look back at your policy and ensure that the beneficiary is still the valid recipient.
Are there any situations in which the contingent beneficiary would be ineligible to receive the payout?
There are a couple of circumstances where a contingent beneficiary cannot receive the death benefit.
Firstly, if the beneficiary takes your life in order to get the death benefit, they won’t be able to receive the payout. The slayer rule is another name it.
Secondly, if the policyholder commits suicide within two years of taking out the policy, insurers will not pay the benefit, though some insurers do refund the premiums.