Contingent BeneficiaryExplained, Advantages & Disadvantages, and Examples

Written By:
Lisa Borga

A contingent beneficiary, also known as a secondary beneficiary, is the individual or organization designated to receive assets such as the benefits of an insurance contract or retirement account if the primary beneficiary is unable or unwilling to do so at the time when the benefits are ready to be paid.

A contingent beneficiary is second in line to a primary beneficiary and essentially serves as a backup plan just in case the primary beneficiary is unable to receive the proceeds.

Contingent Beneficiaries Explained

The individual crafting a will has a considerable degree of leeway in crafting the conditions under which assets will be distributed.

If the primary beneficiaries fulfill any conditions specified in the will, the contingent beneficiaries will not receive anything.

This may occur if, for example, an individual names their spouse as the primary beneficiary and lists their child as a contingent beneficiary.

If this individual were to pass away while their spouse was still living, then their assets would pass to the spouse, and the child would not receive anything.

However, a contingent beneficiary does not need to be an individual person and could instead be several people, charities, trusts, estates, or other organizations.

Notably, beneficiaries must be able to legally accept the assets, which means that pets or minors cannot be beneficiaries by themselves.

A legal guardian will need to be appointed in the case of minor children in order to oversee assets until the children come of age.

Both primary and contingent beneficiaries may be named in any assigned percentages adding up to 100%.

In the event that a primary beneficiary is unable or unwilling to receive proceeds, the specified contingent beneficiary will receive the benefits in lieu of the primary beneficiary.

This means that they will receive the same value of benefits in the exact same way.

This means that if, for instance, a life insurance policy pays $100,000 over the period of five years and the primary beneficiary is unable to receive the proceeds, the contingent beneficiary will receive this same amount over the same five-year period.

When a primary or contingent beneficiary is named, it is a legal proclamation of who will receive assets upon the individual’s death.

Whether it is retirement accounts, insurance policies, or other assets, it is important to ensure that these proceeds will go where their owner wants them to.

As a result, it is crucial to ensure that policies and wills are regularly updated in the event of life changes and contingent beneficiaries are named when appropriate to avoid assets ending up in probate.

Contingent Beneficiaries vs. Primary Beneficiaries

The easiest way to consider the difference between primary and contingent beneficiaries is to think of them as a line to receive your assets.

A primary beneficiary is first in line to receive any proceeds.

The only way a contingent beneficiary can reach the front of the line is if the primary beneficiary were to exit the line.

Quite simply, a primary beneficiary is an individual chosen to receive assets, and their inheritance will not be impacted by designating a contingent beneficiary.

A contingent beneficiary guarantees that if the primary beneficiary cannot receive an asset, it will go to the person or group the individual designating would like to receive assets in their first choices stead.

Advantages and Disadvantages of Designating Contingent Beneficiaries

There are several benefits and a few disadvantages to consider in naming a contingent beneficiary.

Advantages

The advantages of naming a contingent beneficiary include:

• Helps to Avoid Probate: By naming contingent beneficiaries, the unnecessary cost and time associated with probate, which is the legal process of dividing up a deceased individual’s assets by a court, can often be avoided. Otherwise, in the absence of a primary beneficiary, probate is often likely.
• Offers Flexibility: An individual can create contingencies for inheritors to receive proceeds from their insurance policies or retirement accounts. This can offer an individual the ability to create conditions in order for someone to inherit their assets. This could take the form of requiring an individual to someone graduate college or become married before they are able to claim an inheritance.
• Prevents Disputes: Naming a contingent beneficiary can prevent disputes in the event that a primary beneficiary is unable to inherit. For example, consider if someone were to name their spouse as the primary beneficiary of their insurance policy and individual retirement account and their alma mater as a contingent beneficiary. If their spouse were to pass away before them, other family members still could not fight over the inheritance because the college was already named as a contingent beneficiary.

Disadvantages

There are a few disadvantages of naming a contingent beneficiary as well. These include:

• Increased Costs: The more complex an estate is, the more costly it will be to settle. This means that it will reduce the value of the estate to be left to heirs. Designating specific beneficiary accounts can lead to unnecessary complexity.
• Requires Updating Beneficiaries: In order to ensure that primary and contingent beneficiaries actually can receive the assets that they are designated, it is critical to update them. Often times it is up to the beneficiaries to claim the assets to which they are entitled. If beneficiaries are unaware of what they are designated to receive, they may not be able to claim them.
• No Protection from Creditors: A directly named contingent beneficiary, just like a primary one, will receive the proceeds of an inherited asset directly. This means that if the individual is in debt, the proceeds may be seized to pay their creditors. This means that designating a trust can be a better choice to ensure that an individual receives the benefits of an asset.

Example of a Contingent Beneficiary

As an example of a contingent beneficiary, consider Sue. Sue has one child who she has named as the primary beneficiary on her life insurance plan.

Sue also has two sisters who she has named as contingent beneficiaries to receive and share the proceeds equally if her child is unable or unwilling to accept it.

As a somewhat more complex example, consider John’s estate plan.

John has a wife, brother, and two kids.

For his IRA plan, he has designated his wife as the primary beneficiary and his two children and brother as contingent beneficiaries to share proceeds equally.

For his insurance plan, he has designated his wife and children all as primary beneficiaries to share the proceeds equally, with his wife as guardian of the children’s assets if they are minors at the time of his passing.

For this insurance plan, John has designated his brother as the contingent beneficiary.

If John were to pass away, his wife would be first in line to receive his IRA account and an equal portion of his insurance benefits alongside his two children.

However, if John’s wife were to be deceased at the time of his passing, his children would share the insurance proceeds, and the proceeds from the IRA would be distributed equally amongst his two children and brother.

Key Takeaways

• A contingent beneficiary serves as a backup plan and will receive assets if the primary beneficiary cannot or will not do so.
• Contingent beneficiaries can be named or both insurance policies and retirement accounts.
• More than one primary and contingent beneficiary can be named, and all can be designated certain percentages of the value of accounts.
• Contingent beneficiaries can be changed in order to reflect changing circumstances generally by filing a form with the organization holding the contract or account.