What is a contingent beneficiary—and why are they important?

Let’s start with primary beneficiaries

Many people who apply for life insurance do so because they want to help protect their loved ones financially. Life insurance companies typically ask you to list some or all of these individuals on your policy as the “primary” beneficiaries. Primary beneficiaries receive your life insurance policy payout if you pass away. Often, people will name a spouse, sibling, parent or adult child as a primary beneficiary.

Policies often let you have as many primary beneficiaries as you want, and frequently you can divide the payout among your primary beneficiaries as you like. For example, if you have a spouse and three adult children, you might choose to leave 50% of the policy benefit to your spouse, and divide the rest evenly among the children. (Keep in mind that you cannot name children under the age of 18 as beneficiaries. Instead, you must name a legal guardian who will accept the life insurance payout for the children until they reach the age of 18.) Now let's talk about the difference between primary and contingent beneficiaries.

Primary beneficiaries vs. contingent beneficiaries

Ideally, your life insurance benefit will go to your primary beneficiaries. However, suppose your primary beneficiaries are unable to receive the policy payout when you die. This could be because they are deceased themselves, because they simply refuse the payout or because the insurance company cannot locate them over a specified period of time. If this should happen, the payout could go instead to people or organizations you choose as contingent beneficiaries.

Contingent beneficiaries are also known as “secondary beneficiaries” or “remainder” beneficiaries. They have no rights to your policy payout if your primary beneficiaries are alive and willing to take the money you intended for them. However, if your primary beneficiaries cannot accept your life insurance policy payout, the money can go to this next tier of people or organizations you care about.

Keeping your payout out of probate court

One of the great things about life insurance payouts is that, under most circumstances, they can go quickly and directly to your primary beneficiaries without spending time in probate court. (Probate courts oversee the legal process by which states determine how to distribute the property and money the deceased person left behind with or without a will.) However, if the primary beneficiaries don’t claim the payout and you haven’t named contingent beneficiaries, your death benefit could be tied up in probate for a long time, and might even eventually go to someone you didn’t intend to have it. In fact, if there are no contingent beneficiaries, and the state cannot locate any of your friends or relatives through probate, it’s even possible the government will keep your life insurance payout.

So, as you can see, the main reason for having contingent beneficiaries is to help make sure your money goes to someone you want to have it, without a lot of legal hassle and expense.

Who can be a contingent beneficiary?

You can name almost anyone as your contingent beneficiary. However, as in the case of primary beneficiaries, you cannot name children under the age of 18 or pets.

One common scenario is for someone to name their spouse as a primary beneficiary and their adult children as contingent beneficiaries. But you may have many other options as well.

Generally, you can change your contingent beneficiaries as often as you want, and according to the same general rules that apply in the case of your primary beneficiaries.

You might want to consider having more than one contingent beneficiary, so that, if the first contingent beneficiary is unable to accept the benefit, another can take their place.

Conclusion

As you can see, a contingent beneficiary serves as a kind of “insurance” that your life insurance payout will go to a party you choose. Consider naming one or more in your policy, just in case.