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Your life insurance policy is almost always not for you. It’s for those you care about most. When you designate your loved ones as either a primary or contingent beneficiary, your life insurance financially safeguards them regardless of what life brings. You will want to thoughtfully list your life insurance beneficiaries – the particulars matter.
Here, we’ll discuss all the details you need to know about contingent beneficiaries – what they are, why they are important and recommended steps to take for a contingent beneficiary designation. What Is The Contingent Beneficiary Designation?What does a contingent beneficiary mean on a life insurance policy? Definition – A contingent beneficiary, or secondary beneficiary, is a recipient of the insured’s death benefit, should the primary beneficiary be unable or unwilling to accept the death benefit from a life insurance policy.
Primary Beneficiary vs. Contingent BeneficiaryLet’s take a step back. Life insurance policies include two types of beneficiaries: primary and contingent.
Note – In the rare case that the primary and contingent beneficiaries cannot accept a death benefit, a tertiary beneficiary (third-in-line) is sometimes established on a life insurance policy. Contingent Beneficiaries Are ImportantNo doubt, your life insurance policy is valuable. Where your death benefit goes, should you pass away, requires careful planning on your part. So, if there is no contingent beneficiary in place, your life insurance proceeds may be at risk. Let’s ponder some “what-ifs”: Say you and your primary beneficiary pass away (at the same time) in a car accident, and you do not have a contingent beneficiary listed on your life insurance policy. Or, say your primary beneficiary dies before you do, and there are no contingent beneficiaries. In both of those cases, your life insurance proceeds would almost certainly go to your estate:
Key takeaway – A contingent beneficiary is important because it further ensures your death benefit is used as you would like, and unnecessary taxes are averted. Mistakes To Avoid With The Contingent BeneficiaryAgain, careful planning is in order since the details matter. There are seven common contingent beneficiary mistakes to avoid. Your contingent beneficiary is a minor.Be wary of listing a person under the age of majority as a beneficiary. Typically, it’s not lawful to give a child a lump sum of money from life insurance. Instead, a legal guardian (or two guardians) can oversee funds as a requirement. Proceeds often enter into a trust for minor children. Be sure to seek legal counsel. Your contingent beneficiary receives government benefits.Exercise caution when naming a beneficiary with special needs. Financial gifts, like life insurance, often put government financial assistance in jeopardy. Commonly, trusts protect eligibility for government financial assistance. Your contingent beneficiary is your estate.Remember, estates are not tax-friendly. Your life insurance proceeds are subject to the probate process (and taxes) if they enter your estate. Loved ones may miss out on thousands of dollars and precious time. Your contingent beneficiary is your creditor.Life insurance proceeds are typically not subject to creditors. In other words, your death benefit is almost always immune to credit card companies and other entities in which money is owed. Your proceeds can stay in the hands of your loved ones if you skip listing a creditor as a contingent beneficiary. Details are not provided.Be sure to provide specific information about your contingent beneficiaries: For an individual, include their full legal name and social security number (SSN). For an organization, include their tax identification number (TIN) and full address. Include specific conditions: percentage (%) or dollar amounts ($) for each contingent beneficiary. You do not properly set up your policy.Life insurance policies are (almost always) tax advantageous. However, use care when listing the different parties to your life insurance contract. Known as the Goodman Triangle, if the policy owner, insured and beneficiaries are all different people, your life insurance proceeds could be subject to taxes. Your contingent beneficiary doesn’t know about your policy.Millions of dollars of life insurance proceeds go unclaimed every year. Communicate to your beneficiaries about the policy and where to find it. Note – If you intend to list someone besides your spouse as a life insurance beneficiary, and you live in a community property state, plan to get their consent in writing. Community property states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Bottom line – Know and avoid the common contingent beneficiary mistakes made on a life insurance contract. Types Of Contingent BeneficiariesAs a general rule of thumb, you will want to choose beneficiaries who depend on you financially. Consider some common examples of contingent beneficiaries: ParentContingent beneficiaries are often parents. As an example, say you are married with minor children. The contingent beneficiary is your parent while your spouse is your primary beneficiary. If you and your spouse pass away, your parent will become the caretaker of your children. TrustTrusts ensure the distribution of policy proceeds follow your specific wishes. For instance, a trust can provide instructions for when (and how much) funds will be provided to your minor children when they reach specific ages or milestones. Seek legal counsel to establish a trust. CharityCharities can receive tax-advantaged financial gifts through life insurance. If you have a favorite non-profit organization, such as your church, life insurance proceeds are an excellent way to direct funds to a charity. FamilySometimes, it makes sense to have more than one contingent beneficiary. Let’s say you have two siblings. You have the option to direct a specific percentage or dollar amount to different people, like a brother and sister. Contingent Beneficiary ExamplesYour life insurance needs are unique and your beneficiary designations will reflect your personal preferences. To get a general idea, let’s look at a few examples of beneficiary designations:
Note – Typically, it’s recommended you assign death benefit percentages, rather than dollar amounts, to your beneficiaries. Rights Of Contingent BeneficiariesIn order for your contingent beneficiary to have the right to your life insurance death benefit, a number of things must happen:
Some of the contingent beneficiary’s rights depend on the set up of your policy: Revocable vs. Irrevocable Beneficiary
The Difference Between Per Stirpes And Per CapitaPer stirpes and per capita are legal terms that describe how beneficiaries (and potentially their descendants) receive funds.
Important – Life insurance policies trump wills. That is to say, if there is a discrepancy between the wording on a life insurance policy and a will, the life insurance policy takes precedence. Continually Revisit And Update Your Policy As NeededYou will want your life insurance policy to reflect your current needs and wants. Life changes and things happen. Don’t leave your life insurance policy sitting untouched in your file cabinet.
Regularly revisit your life insurance policy. Adjust your beneficiary (primary and contingent) designations if it makes sense. Common life changes that may prompt a beneficiary change include:
Note – The process for updating a primary or contingent beneficiary is usually simple. Typically, you will need to fill out a form provided by your carrier and submit online. Conclusion
Remember, the particulars matter in beneficiary designation, and no detail is too small. To conclude, in order for your contingent beneficiary to reflect your wants and needs, be sure to:
Author: Heidi Mertlich is the owner of NoPhysicalTermLife.com. She is an independent life insurance agent specializing in no medical exam life insurance. Heidi is also an author for LifeInsurancePost.com, an online community of life insurance experts. Related Content |