Whether setting up a financial account, applying for life insurance or executing a will, there's a lot of paperwork required to get everything set up in a way that saves you and your loved ones any added stress.
One admittedly morbid but still incredibly important detail that has to be dealt with for all of these is who gets them after your passing. The more beneficiaries you plan on having, the more complex it can be.
Whether setting everything up by yourself or with the help of a professional, you'll have to deal with the concept of a "contingent beneficiary" for your account, policy or will. So it's important to know what a contingent beneficiary is, how it differs depending on what you're doing and who can even be named one.
Let's start with the first part. What exactly is a contingent beneficiary?
What Is a Contingent Beneficiary?
A contingent beneficiary is the party you select to receive an asset (such as a life insurance payout or property you own) in the event that your first choice to receive these is unable to or chooses not to accept the asset. It is, in a way, a back-up plan to try to make sure your assets still go to a preferred party should something go awry.
A contingent beneficiary isn't just bound by whether or not the primary beneficiary is able to accept the asset first. With a document like a will, you can put other conditions in as well. For example, if your contingent beneficiary for your assets is your 18-year-old child, there may also be a condition that these assets are theirs to receive only after they turn 21, or after they graduate college.
You are able to name more than one contingent beneficiary if you choose, convenient in case, for example, a mother wanted to make her three children the contingent beneficiary for her life insurance policy. You will just have to note the percentage of the asset that each beneficiary would receive - simple enough if you want to divide it equally among your children, but a bit more complicated if you want to give a larger percentage to one party than another.
Life insurance is a common thing that necessitates both a primary and contingent beneficiary, but other financial accounts - a 401(k), an individual retirement account (IRA), a living trust, etc. - can have contingent beneficiaries. Once you've named someone a beneficiary, you should notify them so that they are not caught off guard should they end up in line to receive something.
Contingent Beneficiary vs. Primary Beneficiary
The difference between a primary beneficiary and a contingent beneficiary is fairly simple: the primary beneficiary is first in line to receive the stipulated assets. The contingent beneficiary can only receive them if the primary beneficiary cannot or will not.
One common example of a contingent beneficiary receiving the assets over the primary beneficiary is that the primary beneficiary dies before both the contingent beneficiary and the party giving the assets; for example, a spouse being a person's primary beneficiary and their adult children being the contingent beneficiary should the spouse die first.
However, this is not the only way a contingent beneficiary can receive the assets in lieu of the primary. If the primary beneficiary cannot be found or tracked down, the contingent beneficiary may receive it instead. In addition, the primary beneficiary is not necessarily required to accept assets or proceeds. Should they decide to turn it down, the contingent beneficiary would be next in line to receive it.
Like with a contingent beneficiary, you can easily have more than one primary beneficiary as long as everything is divided up into percentages that add up to 100%. It's possible then, when adding up primary and contingent beneficiaries, to have several parties altogether - a spouse and children as primary beneficiaries and other loved ones as contingent beneficiaries, as an example.
Can You Change Your Contingent Beneficiary?
Yes! You can change your contingent beneficiary or add more contingent beneficiaries if you want - provided it is not an irrevocable account or trust, in which case the details are already set.
But as long as it isn't irrevocable, contingent beneficiaries can be changed if need be. The question of whether to change your beneficiaries is likely to come up regardless of whether you're considering a change or not. You should make sure to review the details of your financial account/trust/will from time to time just to make sure everything still works for your current financial situation and any changes that have occurred since you last checked. Those changes may necessitate a switch in your contingent beneficiary. If you get a divorce, you may decide that your children, who were contingent beneficiaries, are now your primary ones, meaning you must also change your contingent ones.
Who Can Be Named a Contingent Beneficiary?
As has been mentioned several times already, family members can be named as both primary and contingent beneficiaries. If you have a large family, that may be all you need to know for this. But if you have other parties in mind, family is far from the only option when it comes to naming a beneficiary.
In theory, any adult in your life can be named a contingent beneficiary, be they extended family, friends, co-workers and much more. Estates can also be named a beneficiary. You can even, if you want to give your money away after your passing, name a charity or nonprofit organization as a beneficiary.
Can a Minor Be Named a Contingent Beneficiary?
You may wonder if you can make your children a contingent beneficiary if they are not yet of legal age. If they are not 18 or 21 (depending on local laws), they are legally unable to accept the assets.
Should you want to make them beneficiaries, you will need to name a guardian who manages the assets until the minor is of age to accept them. This is also what you should do if your will puts additional stipulations in, i.e. that they can't receive assets until they have finished college.
Why Should You Name a Contingent Beneficiary?
A contingent beneficiary isn't always required for financial accounts and insurance policies. But it's highly recommended, not just for your own peace of mind but to take away what would become a lot of unnecessary stress for your family.
If there isn't an established beneficiary for your assets after your death, these assets end up going into probate. Once this happens, the parties who wish to receive those assets will have to fight for them in court, which can lead to intense and expensive family court drama.
With a primary and contingent beneficiary, the legal drama is no longer necessary and no one can manipulate what your wishes were for your assets. Everything is stipulated legally, and the contingent beneficiary allows for a firm back-up plan in case of emergency. You are providing peace of mind for you and your loved ones, settling everything while you can.