What is a Contingent Beneficiary?
The term “contingent beneficiary” refers to the designated alternative beneficiary who will be the recipient of 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, a contingent beneficiary is the second beneficiary who will wait in the wings, just in case the financial account can’t be transferred to the first person or primary beneficiary. For example, the financial account mentioned above 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.
Some of the key takeaways of the article are:
- 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.
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, then 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 that of the spouse.
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 continued to be 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. If the beneficiary is a minor, a legal guardian must be appointed to oversee the assets on his/ her behalf until he/ she attains maturity. Typically, family members, other relatives, and close friends are listed as contingent beneficiaries.
Some of the significant advantages are as follows:
- 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 the distribution of the account holder’s assets in the absence of 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.
Some of the major disadvantages are as follows:
- 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.
So, it can be seen that designating beneficiaries guarantees that the dependents find financial support even after the account holder’s death. Ideally, it is expected that the primary beneficiary would seldom die before the account holder, but assigning a contingent beneficiary is about planning for the worst-case scenario.
This is a guide to the Contingent Beneficiary. Here we also discuss the definition, working, and examples of Contingent Beneficiary along with their advantages and disadvantages. You may also have a look at the following articles to learn more –