What is a Contingent Beneficiary?

The term “contingent beneficiary” is used frequently in wills, trusts, and insurance policies. A beneficiary is someone who benefits from a gift, such as from a will, trust, or insurance policy. When the term “contingent” is used, it means there are certain circumstances that must occur for the beneficiary to receive the benefit. The contract or policy will state who the beneficiaries are, and if any contingencies to receiving the benefits exist.

Sometimes on tests you will see “which of the following best describes a contingent beneficiary?”

What they are usually looking for is what sets contingent beneficiaries apart from primary beneficiaries. They want you to know that contingents do not receive any assets or benefits unless the primary is unable to accept the benefit.  Sometimes, there are stipulations to a person receiving a gift or benefit. As a result, their failure to comply with the stipulations allows for a contingency beneficiary to take the benefit instead.

What is a Primary Beneficiary?

A primary beneficiary is the person who you would most like to have your asset(s) if you die.

Do you have any assets, such as life insurance policies, 401k accounts, or trust accounts? Then, you can add a beneficiary to the policy or account. That way they take ownership of the asset upon your death.

In most cases, the primary beneficiary is a spouse or child, but it doesn’t have to be. You can choose whoever you want to be the primary beneficiary. If the primary beneficiary cannot accept the gift, then it is given to the secondary beneficiary. However, you must have one listed. If you don’t have a contingency beneficiary listed, it depends on the terms of the account what happens to your assets. Also, it will depend on the laws in your state. Sometimes, the next of kin will have rights to the inheritance if there is no will and no beneficiaries.

What is a Contingent Beneficiary in Life Insurance?

Life insurance policies typically gives you the option to add multiple beneficiaries. This is to protect you in the case that one of the beneficiaries is unable to accept the policy benefits. The primary beneficiary for a life insurance policy is the person you assign to receive the benefits upon your death.

The secondary beneficiary is often referred to as the contingent beneficiary. They are given the benefit if the primary is not alive or cannot accept the benefit for any reason.

In addition, life insurance policies allow you to add as many beneficiaries as you want. Are you are trying to decide how many contingency beneficiaries you need? Then, consider the people you’ve chosen, and whether there is a good chance they would pass away before you. If anyone on your beneficiary list passes away, or becomes unable to accept your policy benefit, you should update your policy immediately and add an additional beneficiary.

What is a Contingent Beneficiary in IRA/Roth IRA?

The beneficiaries of your financial assets work in same way as they do with life insurance. If you have assets that have beneficiaries listed, you will have a primary beneficiary. In addition, hopefully you will have contingent beneficiaries. The contingent beneficiary of your IRA account is one that will receive the funds if the primary beneficiaries are not able to claim the assets for any reason. The same is true for 401k accounts.

What is a Contingent Beneficiary in a Trust Account?

Trust accounts can be a little more complicated. Especially, if the trust account is being held for someone that you have already named. Third parties usually hold trust accounts. Typically, you will pay a third party to hold the account until your stipulations have been met. Then, they release the assets to the beneficiary.

The complications with adding contingency beneficiaries to a trust account occurs when the primary beneficiary is already listed as a joint owner. This considered an irrevocable trust, and they also have to approve who the contingent beneficiaries are. If you are trying to set up beneficiaries for your assets, you can speak with an estate attorney. They can help you evaluate your assets and make a plan for listing beneficiaries.

What is a Tertiary Beneficiary?

A tertiary beneficiary is similar to a contingent beneficiary. However, they only receive the assets if the primary and contingent beneficiaries are unable to accept the assets. It is very rare that a tertiary will receive any assets. But, if you are extra cautious about where your assets end up, you can set up a tertiary beneficiary. Also remember, you don’t have to name a person as a beneficiary. You can name trust accounts, business (such as the funeral home), and even charities as your beneficiaries.

Can you name multiple primary and contingent beneficiaries?

With almost all assets, you can name multiple beneficiaries. This allows the asset to be split amongst the all beneficiaries. Also, you can also choose the percentage that each beneficiary receives. For example, let’s say you have a life insurance policy. You want to leave it to your two adult children. So, you can list both of them as primary beneficiaries, receiving 50% of the benefit each. Note, when you are splitting assets, you have to decide how you want the asset split if one of the primary beneficiaries is not able to accept the asset.

For example, let’s say you leave your life insurance policy to your two children. However, one of them passes at the same time as you. In this instance, you can have the insurance policy set up to give your living child the full 100% of the policy. Or, you can allow that 50% to go to the children or spouse of your child that passed.

This is also possible in the case of real property, or real estate. Although, it can complicate things when the beneficiaries are wanting to sell. Or, if they do not accept their portion of the real estate, if the real estate is not able to be physically split. Just like you can have multiple primary beneficiaries, you can also have multiple contingent beneficiaries to receive split assets.

Final Thoughts on Contingent Beneficiaries

To sum it up, contingent beneficiaries are secondary to primary beneficiaries. They receive benefits only when certain events take place to displace the first named beneficiaries.

So, we hope this clears up the differences between beneficiary designations on legal documents, including life insurance policies.

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