What Is a Contingent Beneficiary

A contingent beneficiary is specified by an insurance contract holder or retirement account owner as the person or entity receiving proceeds if the primary beneficiary is deceased, unable to be located, or refuses the inheritance at the time the proceeds are to be paid. A contingent beneficiary is entitled to insurance proceeds or retirement assets only if certain predetermined conditions are met at the time of the insured's death, such as information found in a will.

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Contingent Beneficiary

Key Takeaways

  • A contingent beneficiary is a beneficiary of proceeds or a payout if the primary beneficiary is deceased or unable to be located.
  • A contingent beneficiary can be named in an insurance contract or a retirement account.
  • Multiple contingent beneficiaries can be listed in which each beneficiary is designated a specific percentage of the money, adding up to 100%.

How Contingent Beneficiary Assignment Works

For a contingent beneficiary of a will, virtually any conditions may be in place; it depends entirely on the person drafting the will. A contingent beneficiary will receive nothing if the primary beneficiary accepts an inheritance. For example, let us say Cheryl lists her husband John as the primary beneficiary for her life insurance policy and their two children as contingent beneficiaries. When Cheryl dies, John receives the insurance payout and the children receive nothing. If John predeceases Cheryl, their children each receive half the proceeds.

Characteristics of Contingent Beneficiaries

Contingent beneficiaries can be people, organizations, estates, charities, or trusts. Minor children or pets do not qualify because they do not have the legal power to accept assigned assets. If a minor is listed as a contingent beneficiary, a legal guardian is appointed to oversee the money until the minor reaches legal age. Although it's more common for contingent beneficiaries to be immediate family members, close friends and other relatives are often listed as well.

Multiple contingent beneficiaries may be listed on a life insurance policy or retirement account. Each beneficiary is designated a specific percentage of the money, adding up to 100%. A contingent beneficiary receives assets in the same manner stated for the primary beneficiary. For example, a primary beneficiary receiving $1,000 per month for 10 years means a contingent beneficiary receives payments in the same way.

Contingent beneficiaries need to be reviewed and updated after major life changes, such as marriage, divorce, birth, or death. For example, after Bob and Sue divorce, he updates his life insurance policy so his daughter Samantha is the primary beneficiary and his son Jackson is the contingent beneficiary. Bob successfully blocks Sue from receiving his life insurance proceeds.

Benefits of Naming Contingent Beneficiaries

Naming a contingent beneficiary for a life insurance policy or retirement account helps one’s family avoid unnecessary time and expenses related to probate. Probate is the legal process of distributing a deceased person's assets when there is no will.

For example, Sarah lists her children's stepfather Alex as the primary beneficiary and her favorite charity as the contingent beneficiary for her life insurance proceeds. Even if Alex dies before Sarah, her children cannot fight over her life insurance benefits because she listed the charity as the contingent beneficiary.

A life insurance policyholder or retirement account owner can create contingencies preventing an inheritance without meeting certain qualifications. For example, an individual retirement account (IRA) owner could establish her daughter as the contingent beneficiary and attach a restriction that she may only inherit the money after she completes college.

Another thing to note is due to the passage of the SECURE Act in 2019, non-spousal beneficiaries must withdraw 100% of the IRA funds by the end of the 10th year following the IRA owner's death.