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Primary vs. contingent beneficiaries
Understand your beneficiaries roles and how to keep your benefit out of probate court.
When you apply for a life insurance policy, you’ll decide who receives the payout when you die. You may already have someone in mind, but considering multiple beneficiaries can help you ensure care for your whole family.
What's in this guide?
What is a primary beneficiary?
The primary beneficiary is the person or entity you select to receive your life insurance benefit. You can name one primary beneficiary or choose to split the money between several primary beneficiaries and stipulate a percentage for each.
What is a contingent beneficiary?
The contingent beneficiary is the person or entity who receives your benefit if the primary beneficiary is dead or missing, refuses the benefit or has been declared legally incompetent. As with the primary beneficiary, you can have one or multiple contingent beneficiaries.
Do I need a contingent beneficiary?
It’s a good idea to have at least one contingent beneficiary. If you don’t choose a contingent, and the primary beneficiary can’t accept the benefit, the money is paid to your estate.
Once the money is in your estate, it’s subject to a lengthy court process called probate — which means a judge decides who gets your payout.
Who can be my beneficiary?
The main rule is that your primary beneficiary must be legally competent to receive the benefit, but beyond that, you have many options.
- One person. Most people designate their spouse or significant other as their beneficiary, but you can select anyone you trust.
- Several people or entities. You can select multiple beneficiaries and decide whether they should split the money evenly or designate a percentage for each beneficiary.
- A minor child. You can designate a minor as your primary or contingent beneficiary, but minors can’t directly receive life insurance money. However, you can still leave your money to your child through a designated custodian or trust. If you choose a trust, you’ll need to name a trusted guardian to oversee the trust until the child is of age.
- Charity. Some life insurance policies come with a charity endorsement that pays out a benefit to a charity in addition to your death benefit. But you can also designate a charitable organization as the beneficiary of your policy.
- Co-owner of your business. If you own a business, you can designate your co-owner as a beneficiary, and give them the option to buy the other half of the business from your estate.
- Your estate. You can designate your own estate as a beneficiary, but there are tax implications for this selection. You may want to consult with a tax professional before making this designation.
What should I watch out for when choosing a beneficiary?
When choosing primary and contingent beneficiaries, keep the following tips in mind:
- Choose someone you trust. The point of a life insurance payout is to make sure your wishes are honored, whether that’s to take care of your family or to do something else with the money to preserve your legacy. Make sure you select someone you trust to honor your wishes and communicate with them so they know what you want.
- Be specific about the person. Naming “my spouse” or “my children” could cause confusion down the line, such as if you get divorced. It’s best to use legal names and ensure you have their specific details listed, such as date of birth and Social Security number.
- Understand your beneficiary’s financial situation. If your beneficiary relies on government assistance to survive, a sudden influx of cash may threaten those benefits, including medical benefits.
- Remember your will. Your Last Will and Testament will not supersede how you designate the beneficiaries of your life insurance policy. So make sure your will and insurance policy are in agreement.
- Check your state’s laws. Your state may have some restrictions on who can benefit from your life insurance policy, so make sure you work within the law. For example, if you live in a community property state, your spouse may be entitled to up to 50% of your death benefit regardless of whether you name them as a beneficiary.
- Update your beneficiary periodically. A lot can happen over the years you pay into your life insurance policy, and it’s important to review your beneficiaries when big life events happen to make sure you’re not leaving your benefit to someone who has passed away or is no longer in your life.
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Bottom line
Choosing the right primary beneficiaries can determine whether your family is taken care of in line with your wishes. It’s equally important to have a trusted back-up beneficiary in place, to ensure your death benefit goes to the people who need it most without being delayed by probate.
If you’re shopping around for a life insurance policy, take the time to compare life insurance companies.
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