What is a Contingent Beneficiary?
A contingent beneficiary is the person, people, or entity that receives a life insurance policy’s payout if the primary beneficiary is unable to do so. When someone buys a life insurance policy, they get to choose both the primary and contingent beneficiaries.
Understanding beneficiaries
People don’t buy life insurance for themselves. Instead, they purchase this coverage to leave a sum of money behind when they pass away.
When they put the policy in place, the insurance provider asks them to name a primary beneficiary or beneficiaries. This can be a person, multiple people, or an entity like a trust or charity.
Then, when the insured individual dies, the beneficiary/beneficiaries receive the life insurance policy’s payout. The sum of money is called a death benefit. It’s not subject to taxes and the beneficiary can use the money however they want.
This all assumes that the primary beneficiary is still living and can be located. If not, one of two things can happen. If the policy only listed a primary beneficiary, the death benefit goes to the now-deceased individual’s estate, where it could be subject to estate taxes.
But if the insured named a contingent beneficiary, they become eligible to receive the death benefit.
Primary vs contingent beneficiary
A contingent beneficiary, also known as the secondary beneficiary, will only get a policy’s death benefit if the primary beneficiary cannot claim it. They will need to wait to receive that money until the life insurance company has confirmed that the primary beneficiary is deceased or unlocatable.
Just like primary beneficiaries, a life insurance policy can name multiple contingent beneficiaries. In most cases, the money will be distributed by percentages (e.g., two individuals each get 50%).
Naming contingent beneficiaries
It’s a relatively common situation for partnered people with children to name their partners as the primary beneficiary and their children as the contingent beneficiaries. If your children are minors, though, you’ll need to name a custodian for them, as well. You might be tempted to name your partner, but most insurance professionals advise against this.
If your partner is unable to act as the primary beneficiary because they either passed away or can’t be found, they also won’t be able to act as the custodian for the amount your children will receive.