What is a Contingent Beneficiary? (Explained)

What is a Contingent Beneficiary? And Why are contingent beneficiaries important? Well a contingent beneficiary is someone who benefits from a contingent contract; they profit from a promise, which may or may be fulfilled, to do or abstain from doing a certain thing. This matter itself is realized only on the happening of some future uncertain event.

When signing up for life insurance, one of the things you’ll be asked to do on the paperwork is name a primary and contingent beneficiary. You probably already know what a beneficiary is – the person who receives the financial benefits of your life insurance policy when you pass away. However, these two terms can be a bit confusing. Here’s what you need to know about primary vs. contingent beneficiaries.

What is a Contingent Beneficiary? (Explained)

Your primary beneficiary is the main person you want to receive your benefits if you pass away. Most people choose their partner or a close family member as their primary beneficiary. However, if your primary beneficiary cannot receive the benefits for some reason, they will go to your contingent beneficiary. Your contingent beneficiary is essentially your backup beneficiary. While you aren’t required to name a contingent beneficiary, you absolutely should. It’s likely your insurance policy will be in place for a long time, and you never know what could happen between now and the time of your death.

Why are contingent beneficiaries important?

Although it’s not pleasant to think about, there’s always the chance that your primary beneficiary might be deceased at the time of your death. If this happens, naming a contingent beneficiary will ensure that your family or someone you care about still gets the money to use for things like funeral expenses and paying off debts. If you don’t name a contingent beneficiary, your life insurance benefit would be considered part of your estate. You want to avoid this because then your family will be responsible for paying estate taxes on your life insurance benefit, which could be quite expensive. Additionally, you could end up with serious delays as your insurance policy is processed. This becomes problematic for your family because they won’t have money accessible for funeral expenses or paying off debts.

Who should I choose as my contingent beneficiary?

Many people are unsure who they should choose as their contingent beneficiary. A close family member or an adult child that you have a good relationship with is typically a good choice. You may also want to consider a very close friend. It is very important that your contingent beneficiary is someone you and the people you are close to have a good relationship with, and that you feel you can trust them with your life insurance benefits. They should understand your wishes for your estate and be able to effectively communicate with others who would be impacted by your death.

Many people want to name their minor children as their contingent beneficiaries. Keep in mind that if you do this, you will have to name a financial custodian for them to manage the money until they turn 18. The custodian should never be the primary beneficiary because if the contingent beneficiary is receiving the money in the first place, this means that the primary beneficiary is likely deceased or incapacitated in some way.

You should also keep in mind that you can actually name multiple contingent beneficiaries and split up the benefit in percentages. This is a good option if you have multiple children, siblings, or friends that you want to receive equal benefits. This can also ease the burden of one person having to manage the entire death benefit.

People also ask:

What happens to life insurance with no beneficiary?

First, if you are buying a life insurance policy, you need to designate a beneficiary. Even if you are just buying a policy to cover your final expenses and do not have anyone close to you, designating someone as the beneficiary will make the process go a lot faster.

But what happens if someone dies without a beneficiary? A recent court case helped decide this. In Herring v. Campbell, John Wayne Hunter, died without having a designated beneficiary for his pension plan. His two stepsons, whom he raised with his previously deceased wife but never legally adopted, filed a lawsuit after Hunters death to challenge the distribution of his benefits. The company plan administrator determined the stepsons were not entitled to the benefit. Hunter had left his estate to them and referred to him as his sons in his Will. Both a lower court and the U.S. Court of Appeals agreed that, because the company gave the administrator authority to determine eligibility for benefits, the fact that no beneficiaries were designated in the pension plan negated the beneficiaries designated in Hunter’s Will.

Most of the time, with life insurance, if there is no beneficiary, the proceeds will go to the estate, which is then distributed according to the will. But, as you can see with Hunter’s story, it is a lot easier if you go through the appropriate steps and designate your beneficiaries.


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