When you sign up for almost any financial product, whether a savings account, retirement account, or life insurance, you’re asked to fill out information regarding the beneficiary. The beneficiary is someone (or sometimes, more than one person) who will receive the benefit of your account if you should pass away.
Generally, there will be two spaces for beneficiaries: the primary beneficiary and the contingent beneficiary. The primary beneficiary will be first in line to receive the benefit if you pass away. The contingent beneficiary (sometimes also called the secondary beneficiary) is second in line, and they could receive the benefit if the primary beneficiary is unable or unwilling to receive the benefits he or she is entitled to.
How does being a contingent beneficiary affect me?
Being a contingent beneficiary doesn’t affect you unless a) the policyholder passes away, and b) the primary beneficiary can’t or won’t collect the benefits. If the primary beneficiary can collect the benefits, you, as the contingent beneficiary, will receive nothing.
Why do we need contingent beneficiaries?
We need contingent beneficiaries because life can be unpredictable. Most people name their spouse as the primary beneficiary. If you’re in a car accident with your spouse and both of you pass away, the benefits of your policy can be distributed seamlessly to your contingency beneficiary.
Along the same lines, let’s say the person you have listed as your primary beneficiary dies. Hopefully, you have a chance to update all your policies before you pass away. If not, the contingent beneficiary will receive the benefits from your account since the primary beneficiary has passed away.
Can there be more than one contingent beneficiary?
There could be more than one contingent beneficiary. When the policy owner fills out the beneficiary form, the policy owner can designate more than one primary beneficiary and more than one secondary beneficiary. For example, someone could list three primary beneficiaries: their spouse who will receive 50% of the benefit, Child A to receive 25%, and Child B to receive 25%. They could then list all of their grandchildren as contingent beneficiaries.
Essentially, the policyholder can designate as many primary or secondary beneficiaries as he or she wants to. They will designate the amount each person should receive by using percentages or the terms “per stirpes” or “per capita.”
How often should I update the beneficiaries on my policies?
It’s a good practice to review your financial accounts and insurance policies at least once a year to make sure that your beneficiaries are still correct. If your family situation changes (remarriage, divorce, death, the birth of new children, etc.), you will want to be sure that the correct people are listed.
The beneficiaries listed on your policies or accounts generally will supersede your desires in your will, so leaving your ex-spouse as a beneficiary on your policy could result in that person receiving the benefits even though you’re divorced. This is a common and costly mistake, but one that can be avoided with a regular beneficiary review.
Many people take the time to update their will but forget about correcting the beneficiaries of their insurance and financial accounts. Don’t skip this critical step! It may be helpful to keep a spreadsheet of all your accounts and the beneficiaries listed in one place so they are quickly accessible, and you don’t miss any in your review. This can also be beneficial in the event of your death, so your family can easily find all of the accounts and relevant information.
What happens if I don’t name a contingent beneficiary?
Hopefully, the primary beneficiary is still alive and able to collect the benefits that you desired. However, if the primary beneficiary is unable or unwilling to receive the funds they are due, and you don’t have a contingent beneficiary listed, the benefits of your policy or financial account will be distributed according to the wishes in your will. Probate court can be expensive, and the fees associated can reduce the amount of money that your beneficiaries will receive. Generally, as long as your beneficiaries are up-to-date, you can avoid probate court and the payment can be made directly to the beneficiary or contingent beneficiary.
Contingent beneficiaries are an important part of planning your financial legacy and strategy. Making sure that all of your listed beneficiaries are up-to-date can save your loved ones time and money. It can also help make sure that your wishes are clear and keep your loved ones from arguing about who should benefit from your policy.