Contingent Beneficiary

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    Contingent Beneficiary: Why It's Important To Name A Backup

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    When it comes to your life insurance policy, one of the most important decisions you'll make is who your primary and contingent beneficiaries are. In this guide, we'll answer all of your questions about contingent beneficiary designations – read on to find out what makes them different from primary beneficiaries and what rights they have to make a claim.

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    Definition Of Contingent Beneficiary

    After a life insurance policyholder or retirement account owner dies, the primary beneficiary named on their policy/account is entitled to claim a death benefit from the insurance company. However, if the primary beneficiary has passed away or is missing, a contingent beneficiary can claim the life insurance proceeds instead. Contingent beneficiaries can be individuals, entities, organizations, or trusts.

    In the absence of a primary beneficiary, a person or organization listed as a contingent beneficiary should have the right to claim the assets, even though you've left a will and/or living trust that says otherwise. That's because your account is not subject to the probate process and should not be affected by your will.

    If a third-party account manager refuses to release the benefits from a life insurance policy or retirement account, the contingent beneficiary has the right to file a lawsuit.

    Contingent vs Primary Beneficiary

    A primary beneficiary has the right to make the first claim. Contingent beneficiaries are second-in-line to receive the benefit from your life insurance. If you have multiple primary beneficiaries, and one of them dies before you, the insurance company should split the deceased's share evenly among the living beneficiaries. 

    For example, let’s say that your primary beneficiaries are your spouse (50%), your sister (30%), and your brother (20%). If your sister dies before you, then your spouse and your brother will divide your sister's 30% share evenly between them, with each receiving 15% on top of their original share.

    The primary beneficiary can also choose to refuse the inheritance. This sometimes happens with people who were listed as beneficiaries by their estranged spouses or relatives. In this scenario, the next-in-line can also gain access to the assets.

    With that said, contingent beneficiaries should not be able to receive any of the proceeds unless all of the primary ones have passed away or relinquished their claim to the funds.

    In most states, when a primary beneficiary is responsible for the death of the insured, the said beneficiary is not entitled to inherit the funds. In this case, a contingent beneficiary can step in and claim the assets instead. Make sure to check your state law for more information on this.

    Contingent Beneficiary vs Co-Beneficiary

    Generally, you can name more than one primary beneficiary and more than one contingent beneficiary. Persons within the same tier are considered co-beneficiaries.

    If you are listing co-beneficiaries, you need to allocate what percentage each person will receive from your life insurance policies or retirement accounts. For example, you can designate your two children as co-beneficiaries and indicate that each will get 50% after your death. You can also split it unevenly (e.g. 30% for one child, 70% for another).

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    How To Name A Contingent Beneficiary

    Some life insurance companies will require you to list a contingent beneficiary, but most do not. Still, it's advisable to list a person or entity who will receive the assets from your account in case the primary beneficiary cannot.

    You'll have to provide personal information on both the primary beneficiary and the contingent beneficiary, including their full names, social security numbers, and contact information.

    Make sure to be very specific when filling out these details. For example, if you list the word “spouse” as a beneficiary, an ex-spouse may be able to file a claim and get the proceeds upon your passing.

    Contingent beneficiaries must be of legal age and have the legal capacity to accept the asset. You cannot name someone who is mentally incapacitated to manage your assets/estate. Pets cannot be named as contingent beneficiaries, as well.

    As the policy owner, you can also set conditions that the beneficiaries must meet before the benefits are released. Examples include: graduating from college, avoiding legal trouble, or getting married.

    Some insurance companies also allow people to name tertiary or quaternary beneficiaries. You can speak to your personal finance coach or estate planning attorney for more advice on choosing additional beneficiaries.

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    Benefits Of Naming A Contingent Beneficiary

    If you name both primary and contingent beneficiaries, estate planning will be much easier and clearer. There’s no question about who gets what and when – saving your loved ones from having to go through probate court in order to claim the proceeds.

    Keep in mind that if your estate goes into probate, a judge will be the one to decide who gets the assets. This process can take months, depending on the number of possible beneficiaries. Additionally, you won't have any say in who will have access to your assets and estate.

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    Tips For Choosing A Contingent Beneficiary

    Choosing the right contingent beneficiary can be stressful, especially if you don't have a lot of family members who can benefit from your policy or retirement account. If you need tips on choosing a contingent beneficiary, keep reading.

    Designate A Legal Guardian

    It might be tempting to name young children as contingent beneficiaries, especially since they're likely the reason that you bought a life insurance policy in the first place.

    However, if a minor is listed as a contingent beneficiary, a custodian will be in charge of overseeing the money and transfer it to your child once they're of age. Plus, the money may even end up being contested in probate court.

    Another reason to avoid listing young children as a beneficiary is the 2019 SECURE Act. This estate planning law dictates that all of the funds from your retirement account must be withdrawn within 10 years after your passing. If your child is still a minor after that 10-year period has lapsed, then they won't get the asset.

    One way to avoid this scenario is to appoint your children's legal guardian as a contingent beneficiary at the outset. They’ll be in charge of filing the claim, as well as making sure that the money is managed and used for its intended purposes while your children grow up.

    Review Beneficiaries Regularly

    Each time you experience major life changes such as marriage, the birth of a child, or divorce, you'll have to update and review your list of beneficiaries. For example, if you bought life insurance when you were single and listed your parents as beneficiaries, you can switch your beneficiary to your spouse once you're married.

    You'll also need to review your list of beneficiaries if one of your primary beneficiaries passes away. In this case, you might want to "upgrade" one of your contingent beneficiaries and designate them as a primary beneficiary.

    To change your beneficiaries, just get in touch with your life insurance plan agent. Those who want to make changes to their 401(k) or retirement accounts should reach out to their plan administrator.

    Keep in mind that, if your life insurance is irrevocable, you will not be able to change beneficiaries without getting consent from the affected beneficiary. Making changes to beneficiaries for retirement accounts or 401(k)s may also have some tax consequences. Make sure to consult a legal or tax professional before you do this.

    Consider Choosing A Charity, Organization, Or Trust

    Aside from choosing a living person, you can also name a charity, nonprofit organization, or trust to receive the assets from your policy. You could even consider adding your business as a contingent beneficiary.

    If you have children who are disabled or chronically ill, creating a living trust may be the best course of action. This way, trustees can manage the assets for the benefit of your children.

    When naming organizations or trusts as beneficiaries, make sure that someone from that group knows that your policy exists and that they can file a claim after your demise. They'll need a copy of your death certificate to start the claims process and gain access to the assets.

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    Final Thoughts

    Having a contingent beneficiary helps you ensure that the proceeds from your life insurance policies or 401(k) go to the people or entities you choose. Even if your primary beneficiary passes away, you'll have someone whom you trust to receive all or a percentage of the inheritance.

    If you need estate planning or investment advice, contact us at Wesley LLC. We'll help you iron out the details of your policy to make sure that your loved ones are financially secure even after you are gone.

    Written By Cameron McDowell
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