Put simply, a contingent beneficiary on a life insurance policy is like a backup or secondary beneficiary in case your primary one(s) dies at the same time as you, refuse the money, or can’t be found.
If you don’t name a contingent beneficiary and your primary can’t/won’t accept their inheritance, the death benefit becomes part of your estate and goes through probate.
Primary vs Contingent Beneficiary: How Are They Different
Most people buy life insurance to ensure their loved ones are taken care of financially if they pass away unexpectedly. To make this happen, the policyholder needs to name at least one beneficiary to receive their policy’s death benefit.
When choosing beneficiaries, understanding the difference between a primary and a contingent beneficiary is important.
- Primary beneficiary: The person you choose to receive your death benefit
- Contingent beneficiary: The person you choose to receive your death benefit in case your primary is deceased, can’t be located, or refuses benefits.
Because you can name more than one primary beneficiary, a contingent beneficiary only receives your death benefit if all primaries have passed away or refused proceeds first.
What If You Don’t Choose a Contingent Beneficiary?
It’s vital to have both types of beneficiaries. If you don’t designate a contingent beneficiary and your primary can’t receive the death benefit, it reverts into your estate, even if you both die at the same time.
For two reasons, most people want to avoid including life insurance policies in their estates.
1. The value of the life insurance policy will be included as a taxable asset which may push your estate over the exemption amount.
Currently, the federal estate and gift tax exemption is $12.92 million per individual (for 2023). Most people don’t need to be concerned about reaching this amount. However, this exemption will drop to $5 million after 2025. A life insurance policy lumped in with the rest of your assets (house, cars, bank accounts, etc.) may easily exceed the $5 million exemption. Doing so will generate a large tax bill from Uncle Sam, which will be deducted from your death benefit.
In addition, some states have state estate taxes. These are separate from federal estate taxes, and the exemption amounts are much lower than the current $12.92 million mark. So even if you qualify for the federal exemption, your estate may still get hit with a state tax bill. For example, in the state of Minnesota, our exemption limit is about $3 million. A life insurance policy can easily push your entire estate over this number.
2. The life insurance policy will go through probate.
Failing to name a contingent beneficiary could put your death benefit through probate, where the court decides what will happen to it.
Probate is a public procedure. This means the value of your assets and their beneficiaries are listed in court records, and anyone can see them.
If your payout does end up in probate, your insurer issues a check payable to the court, where they deduct probate and attorney fees from the money first.
Assets in probate are also open to creditors. If you have any debt, creditors can take what they’re owed from the life insurance proceeds before the funds are passed to your heirs. Normally, life insurance death benefits are exempt from probate and creditors, but not if it ends up in your estate.
After all these deductions, the remaining balance is distributed according to your will. If you don’t have a will, the money is distributed according to individual state laws called ‘intestacy laws.’
Probate can also take years to complete. The death benefit from the life insurance policy you purchased to protect your loved ones financially may end up not getting to them for a long time.
What if I want more than one life insurance beneficiary?
You can name multiple life insurance beneficiaries. When you select more than one beneficiary, you can designate different percentages to each. The percentages need to add up to equal 100.
- Jane Doe (wife) 50%
- Andrea Smith (sister) 40%
- Animal Humane Society (charitable institution) 10%
If you do not specify percentages, the insurance company will divide the death benefit evenly between the multiple primary beneficiaries.
If you have more than one primary beneficiary and one of the beneficiaries dies prior or at the same time as you, then the death benefit will be split between the remaining primary beneficiaries unless you specify per stirpes or per capita.
Designating per stirpes or per capita takes your beneficiary’s children into consideration. Per stirpes means the deceased primary beneficiary’s share of the death benefit is passed on to his or her children. Per capita means the total death benefit will be split evenly between the surviving primary beneficiaries and the deceased primary beneficiary’s children.
John names his four adult children (Sam, Alan, Louis, and Jennifer) his life insurance policy’s primary beneficiaries per stirpes. Jennifer dies and John doesn’t update his beneficiaries. A year later, John dies. Jennifer’s children, Danny and Jordan, split her share of the death benefit. This means Sam, Alan, and Louis each receive 25% of the death benefit and Danny and Jordan each receive 12.5% of the death benefit.
John names his four adult children (Sam, Alan, Louis, and Jennifer) his life insurance policy’s primary beneficiaries per capita. Jennifer dies and John doesn’t update his beneficiaries. A year later, John dies. Jennifer’s children, Danny and Jordan, are entitled an equal share of the death benefit. This means Sam, Alan, Louis, Danny and Jordan each receive 20% of the death benefit.
In the case of having multiple primary beneficiaries, contingent beneficiaries only receive the death benefit if all of the primary beneficiaries are deceased.
John names his four adult children his life insurance policy’s primary beneficiaries and his favorite charity as the contingent beneficiary. Coming back from a family vacation, John and his four children tragically die in a plane crash. The entire death benefit of John’s life insurance policy goes to the charity.
On the rare occasion that you do not name a contingent beneficiary and you have no heirs for probate assets to pass onto, the life insurance death benefit escheats to the state you live in. In layman’s terms, this means the state gets possession of the funds.
See what you’d pay for life insurance
Choosing a Secondary Life Insurance Beneficiary
Your secondary, or contingent, life insurance beneficiary is simply a backup in case your primary beneficiaries are unable to receive the death benefit. Keep in mind: if you want to guarantee that someone gets a portion of your death benefit, they need to be a primary beneficiary. Who are good candidates for primary and contingent beneficiaries?
- Your spouse and adult children are typical primary life insurance beneficiaries.
- Siblings and favorite charities are great secondary life insurance beneficiary options.
Does my beneficiary need to do anything?
When you buy life insurance, let your beneficiaries know. They will be responsible for starting the claims process when you die. Life insurance companies have millions of customers. They don’t automatically know when one of them dies, so it’s up to your beneficiaries to claim your death benefit. Otherwise, the life insurance company keeps it.
Filing a life insurance claim is fairly straightforward. Understanding it yourself may help you prepare your beneficiary on the basic steps required.
- Contact the insurance agent or employer who sold the policy if the coverage was through a group life policy.
- Obtain a copy of the official death certificate. If you are filing a claim on your spouse, you may need a copy of your marriage license as well.
- Complete a claim form from the life insurance company.
- Submit the claim documents and death certificate to the life insurance company.
Reviewing and Updating Your Life Insurance Policy
It’s important to review your life insurance policy every year and when you have major life-changing events. Not only is it essential to make sure you have adequate coverage, but also to make sure you have your beneficiary designation updated if needed.
Examples of when to review or update your life insurance policy:
- If you’re getting married or divorced
- If you’re buying a home
- If you’re having a baby
- If you’re making changes in employment
- If you’re taking out a new loan
If you’ owner a life insurance policy, you can make life insurance beneficiary changes at any time unless it’s irrevocable. An irrevocable beneficiary has rights to a life insurance policy. The policyowner would need this person’s authorization to make any changes. This is common in divorce agreements. In general, however, the policyowner can make beneficiary changes at any time.
Selecting your primary and contingent beneficiaries is just as important as owning a life insurance policy. When you decide to protect your loved ones from financial disaster, make sure you understand how life insurance works and how funds will be distributed, and let your beneficiaries know they are included in your life insurance policy. You don’t want your death benefit to go unclaimed when you thought you were taking care of your loved ones.
If you don’t already have a life insurance policy in place, take a minute to run a free, no obligation term life insurance quote. Here at Quotacy, we don’t even ask for any personal information until you are ready to apply. A Quotacy agent is waiting to help you through the life insurance buying process.