What Is a Contingent Beneficiary?

If you pass away, life insurance provides the people who you care about with cash, perhaps when they need it most. But there are different types of beneficiaries. When you’re setting up a life insurance policy, you’ll stumble across the term “contingent beneficiary.” What are contingent beneficiaries and how do they fit in? Here’s what you need to know.

What is the difference between a primary and contingent beneficiary? 

If you die, your primary beneficiaries have the first right to claim your policy’s payout, also called the death benefit. You can choose multiple primary beneficiaries if you’d like. So if you have three adult children, you might list all three as primary beneficiaries. Then if you pass, they’ll each receive a payout according to the percentages you chose. 

Think of contingent beneficiaries as alternates. They’re next in line to receive benefits if none of your primary beneficiaries can receive a payout. So if your primary beneficiaries have died, can’t be located, or refuse to accept the money, the benefits go to your contingent beneficiaries.

Why would I want to name a contingent beneficiary? 

Naming contingent beneficiaries can help you achieve your goals. If you want to make sure your kids are well taken care of, for example, you might name your spouse as your primary beneficiary and your children as contingent beneficiaries. That way, if you pass, your spouse will receive funds to take care of the household, your kids’ daily needs, and perhaps future college expenses. In the event that you and your spouse die at the same time, your insurance payout will go directly to your kids, as contingent beneficiaries. (Most insurance companies won’t pay death benefits directly to underage children. So if your kids are minors, you may need to set up a trust and appoint a trustee who can use the money to pay for your child’s expenses.)

Or let’s say you’re close to your brother who helped you build your construction business from scratch. You might name him as your primary beneficiary, so he receives your death benefit, and you might name your sister as your contingent beneficiary. If your brother passes, the money will go to your sister. 

It’s smart to name a contingent beneficiary—or perhaps more than one—because if you don’t, your death benefit will go through probate court, a lengthy process that could keep the money tied up for months. Naming primary and contingent beneficiaries makes your wishes clear and speeds the money to your heirs.

Who can I name as my contingent beneficiaries? 

You can name people, such as family members, close friends, or nearly anyone you like as a contingent beneficiary. While you can’t directly name minor children or pets as beneficiaries—they lack the legal status to accept your life insurance payout—you can set up a trust to ensure they’re taken care of. 

You can also name organizations, like your cupcake business or your favorite charity. You may also name a trust or your estate as a beneficiary. But keep in mind that naming your estate will cause the funds to go through probate, leaving a judge to call the shots. So in the end, your loved ones might end up with little of the money—or none.

How do contingent beneficiaries apply to my estate planning? 

Just like you name beneficiaries for your life insurance policy, you’ll want to do so for your other assets. 

You’ll want to name primary and contingent beneficiaries for your retirement plans such as IRAs and 401(k)s, for example. It’s also a good idea to name beneficiaries for your investment accounts. If you don’t, those accounts will most likely go through the probate process. That means your beneficiaries may not  get their inheritance for months and may have to pay court fees. As with life insurance, these assets will go to your contingent beneficiaries if your primary beneficiaries die, can’t be located, or are unwilling to accept the proceeds.

You can also name contingent beneficiaries when you’re drawing up your will, which spells out who should receive things like your home, bank balances, and treasured possessions. If a primary beneficiary has passed, and you didn’t name an alternate, the state may try to guess your wishes.