Updated July 13, 2023
What is a Contingent Beneficiary?
The term “contingent beneficiary” refers to the designated alternative beneficiary who will receive the proceeds of a financial account if the primary beneficiary is unable or refuses to accept the benefits at the time of payment.
In other words, the second beneficiary will wait in the wings if the financial account can’t be transferred to the first person or primary beneficiary. For example, the above financial account refers to insurance benefits, retirement funds, or inheritance. After assigning the contingent beneficiaries, the account holder needs to review and update the names after any significant life change, such as birth, marriage, divorce, or death. A contingent beneficiary can be an individual or entity, such as an organization, estate, charity, trust, etc.
Key Takeaways
- It refers to an alternate beneficiary of the proceeds or payout of a financial account if the primary beneficiary cannot accept the benefits.
- Examples of financial accounts include insurance contracts, retirement funds, and inheritance.
- The wealth of an account holder will go to probate if he/ she fails to designate a contingent beneficiary and the primary beneficiary cannot accept the wealth for some reason.
- There can be multiple contingent beneficiaries for a single account, with each beneficiary assigned a certain percentage of the benefits.
How Does Contingent Beneficiary Work?
As the name suggests, the gain of a contingent beneficiary is conditional. He/ she will receive nothing if the primary beneficiary accepts the benefits of the financial account. Further, many conditions will be in place depending on the type of account and the person drafting it. A beneficiary must adhere to all these conditions to be eligible for the benefits under the contract. Nevertheless, the rights of a contingent beneficiary are secondary and conditional upon the primary beneficiary’s inability to claim the benefits.
An account holder can designate multiple contingent beneficiaries for a single account, assigning each beneficiary a certain percentage of the overall benefits, all adding up to 100%. Although there is no stated restriction on the number of beneficiaries an account holder can designate, some policies may limit the number, say 10 per asset.
Example of Contingent Beneficiary
Let us understand the concept of the contingent beneficiary with the help of some examples.
Example #1
Let us assume that in his life insurance policy, David mentioned that his spouse should receive the insurance proceeds in the event of his death. It is also mentioned that if his spouse is dead or mentally incapacitated at the time of his death, the insurance proceeds shall go to their children. In this example, David’s wife can be termed as the primary beneficiary, and their children as the contingent beneficiaries, as their claims to the benefit are secondary to the spouse’s.
Example #2
Let us assume that John and Jane married eight years back, and they have a son and a daughter named Mike and Silk, respectively. Recently, John and Jane got divorced. Consequently, John updated his life insurance policy to replace Jane with Silk as the primary beneficiary, while Mike remained the contingent beneficiary. In this way, John ensured that Jane wouldn’t receive any benefits from his life insurance in the event of his death. In this example, it can be seen how John updated the beneficiary names after a significant life event (divorce).
Who is Eligible to be a Contingent Beneficiary?
An account holder can designate an individual or entity, such as an organization, charity, or trust to be the contingent beneficiary of the financial account. However, the selected person must be of legal age and have good mental capacity. The minor beneficiary requires the appointment of a legal guardian to oversee their assets until they reach maturity. Usually, the list of contingent beneficiaries includes family members, other relatives, and close friends.
Advantages
- Assigning a contingent beneficiary for a financial account helps the account holder’s family avoid pointless time and unnecessary expenses related to probate, which is a legal process for distributing the account holder’s assets without a will.
- If an account holder designates the beneficiaries for his/ her assets, it means that after his/ her death, the assets will not go to his/ her estate but will be distributed among the rightful heirs.
Disadvantages
- If the beneficiary is a minor, a key challenge is to identify an honest legal guardian who will be trusted with a large sum of money.
- Executing contingent beneficiaries can become difficult if there are a number of heirs of varying ages.
- Failure to update the names of the designated beneficiaries by the account holder at any significant life event can leave the contract meaningless.
Conclusion
Designating beneficiaries ensures that dependents receive financial support even after the account holder’s death. Ideally, the account holder expects the primary beneficiary to rarely pass away before them, but assigning a contingent beneficiary involves planning for the worst-case scenario.
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