When signing up for life insurance, one of the things you’ll be asked to do on the paperwork is name a primary and contingent beneficiary. You probably already know what a beneficiary is – the person who receives the financial benefits of your life insurance policy when you pass away. However, these two terms can be a bit confusing. Here’s what you need to know about primary vs. contingent beneficiaries.

Contingent Beneficiaries Explained

contingent beneficiaryYour primary beneficiary is the main person you want to receive your benefits if you pass away. Most people choose their partner or a close family member as their primary beneficiary. However, if your primary beneficiary cannot receive the benefits for some reason, they will go to your contingent beneficiary. Your contingent beneficiary is essentially your backup beneficiary. While you aren’t required to name a contingent beneficiary, you absolutely should. It’s likely your insurance policy will be in place for a long time, and you never know what could happen between now and the time of your death.

Why are contingent beneficiaries important?

Although it’s not pleasant to think about, there’s always the chance that your primary beneficiary might be deceased at the time of your death. If this happens, naming a contingent beneficiary will ensure that your family or someone you care about still gets the money to use for things like funeral expenses and paying off debts. If you don’t name a contingent beneficiary, your life insurance benefit would be considered part of your estate. You want to avoid this because then your family will be responsible for paying estate taxes on your life insurance benefit, which could be quite expensive. Additionally, you could end up with serious delays as your insurance policy is processed. This becomes problematic for your family because they won’t have money accessible for funeral expenses or paying off debts.

Who should I choose as my contingent beneficiary?

Many people are unsure who they should choose as their contingent beneficiary. A close family member or an adult child that you have a good relationship with is typically a good choice. You may also want to consider a very close friend. It is very important that your contingent beneficiary is someone you and the people you are close to have a good relationship with, and that you feel you can trust them with your life insurance benefits. They should understand your wishes for your estate and be able to effectively communicate with others who would be impacted by your death.

Many people want to name their minor children as their contingent beneficiaries. Keep in mind that if you do this, you will have to name a financial custodian for them to manage the money until they turn 18. The custodian should never be the primary beneficiary because if the contingent beneficiary is receiving the money in the first place, this means that the primary beneficiary is likely deceased or incapacitated in some way.

You should also keep in mind that you can actually name multiple contingent beneficiaries and split up the benefit in percentages. This is a good option if you have multiple children, siblings, or friends that you want to receive equal benefits. This can also ease the burden of one person having to manage the entire death benefit.

Common Beneficiary Mistakes

Ideally, you should review your life insurance policy once a year to make sure it is still up to date. This includes reviewing your beneficiaries. You can change your beneficiaries at any time, so if your personal relationship with them has changed, don’t think you are stuck with them as the recipient of your death benefit. One of the biggest mistakes people make is forgetting to change their life insurance policy after a huge life event, like a death, divorce, or new marriage. If your beneficiaries, both primary and contingent, are out of date, it could result in serious legal trouble for your family and friends down the line.

The other biggest mistake that people make with their beneficiaries is naming someone who can’t legally claim it. It’s very common that people will name a minor without naming a custodian, which places everyone in hot water. Depending on which state you live in, minors can’t claim an insurance benefit until they are 18 or 21. Many people also make the mistake of naming their pets as beneficiaries, but pets don’t have the legal status to claim the money.

It may be tempting to skip naming a contingent beneficiary, since picking one can be a difficult decision. However, this isn’t something you should gloss over, as avoiding it can have serious negative repercussions for your family. If you are really struggling to decide who you should name as your contingent beneficiary, it may help to talk to a life insurance agent to sort things out.

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