One of the most important decisions you make when purchasing a life insurance policy is choosing your beneficiary. A beneficiary on your life insurance policy is a person who receives the benefits of the policy in the event of your death. But what if this person is unable to make claim on your policy or passes away even before he knows about it? This is where you need a secondary or contingent beneficiary named on your life insurance policy.
Why You Need a Life Insurance Beneficiary?
Naming a life insurance beneficiary is important and an easy process. It is to make sure that your life insurance proceeds are going into the hands of the right person. Failing to do can cost your family in the long run.
Not only a quality life insurance policy helps you diversify your financial portfolio, but it can also help provide your family with a sense of financial security if you are no longer around. However, though the potential benefits of a life insurance policy are often well-known, crafting a life insurance policy that is specific to your financial situation can be rather difficult. Certain situations, such as the need for contingent beneficiaries, can make the process of designing a life insurance policy a bit more complicated.
Fortunately, with the right knowledge in hand, you will be able to find a life insurance policy that is right for you. By taking the time to think about all of the details involved in the life insurance underwriting process, you will immediately be able to add value to the policy itself.
In this article, we will discuss the most important things you need to know about life insurance and also explain the meaning of the term “contingent beneficiary.” Choosing a contingent beneficiary can often be a very important decision that will have a tremendous impact on the financial well-being of your loved ones. Overlooking this particular component of your life insurance can often be quite costly.
What is a Contingent Beneficiary?
As the name might imply, your contingent beneficiary is the individual who will receive the death benefits of your life insurance on a certain series of events unfolding. Typically, this contingency rests on both you (the initial policyholder) and your primary beneficiary having both passed away.
Primary vs. Contingent Beneficiary:
In simpler words, a contingent beneficiary is second in line. First in line is your designated or primary beneficiary.
Let us explain it to you with an example:
John is a 35-year-old man. He bought a 30-year term policy with a coverage amount of $500,000 policy. John designated his spouse ‘Sara’ as a primary beneficiary and his daughter ‘Sam’ as a contingent beneficiary on his insurance policy.
If John dies, Sara gets everything.
If John dies and Sara also dies at the same time or prior to his death, then Sam will get everything.
If you pass away and your primary beneficiary (or beneficiaries) is still alive, then your contingent beneficiary will not be entitled to receive any of your policy’s death benefits. If there is any reason that you would, in fact, like them to receive a portion of your policy, then you will need to declare them as a primary beneficiary before you have passed away.
One thing that is important to note is that you can distribute your death benefits in any fraction you see fit. If you want to give half of your benefits to your spouse and one-quarter of your benefits to each of your children, that will be entirely up to you.
You also have an option to assign tertiary beneficiaries. They would be able to able to claim your death benefit in the case if all your primary and secondary beneficiaries have passed away.
Contingent Beneficiary Is Not Necessarily An Another Person
It is important to recognize that while a contingent beneficiary is usually another person, that doesn’t necessarily mean that you must choose another person. There are a variety of different legal entities that you can select as your secondary beneficiary as well.
For example, if you are thinking “I would love to give the benefits of my life insurance policy to my spouse, however, if they are not around, then I would like to give the money to charity,” you should recognize this is a viable option.
You could also send the money directly to your estate, a trust, or a variety of other non-human entities. Both your first choice and your second choice for where your life insurance benefits are directed will be your decision to make—regardless, this decision will be one that needs to be made in advance. Though you do reserve the right to purchase a life insurance policy without having chosen a specific sequence of beneficiaries, failing to do so can create a wide variety of future legal complications.
How Does a Life Insurance Policy Work?
When compared to some other financial assets, life insurance is relatively straightforward. Essentially, in exchange for a small amount of money each month (your monthly premium), a large lump-sum payment (your death benefit) will be distributed to a predetermined party in the event of your death. This way, even if someone is currently financially dependent on you in the status quo, you can rest assured that they will be taken care of.
However, life insurance can often be a bit more nuanced than the simplified explanation offered above. For example, you will need to choose whether your policy is a term life insurance policy (lasting up to 30 years) or a permanent life insurance policy (lasting your entire life). Permanent life insurance policies will often have a usable “cash value” attached to them as well.
Once you have decided the type of life insurance policy that you hope to purchase, you will need to apply and then qualify for that policy. Life insurance companies will typically want to take a look at your medical history, age, gender, and certain lifestyle factors (such as smoking) before deciding how much you will be required to pay each month. Then, once you have qualified for the life insurance policy of your choosing, it will be time for you to choose a beneficiary. Your beneficiary is the individual who will receive your policy’s death benefits if you were to pass away while the policy is active.
What Do I Need to Know About Choosing a Beneficiary?
Choosing your beneficiary is a very personal decision that certainly needs to be taken seriously. Once you have passed away, the benefits of your life insurance will not simply be passed to whomever it “seems” you would probably want to give your death benefits to. Instead, your death benefits will be distributed to whomever you have legally chosen in writing.
Some people who are in unique financial or personal situations may find themselves struggling to decide who the death benefits of their life insurance policy should be distributed to.
Fortunately, there are a few simple questions you can ask yourself to narrow down your options.
* Do you currently have any financial dependents? How will these people provide for themselves in the event of your absence?
* Are you currently married, engaged, or in a committed relationship? Do you have any children, immediate relatives, or other close relatives?
* Do you have any other financial assets included in your estate? Have you chosen who these financial assets will be distributed to?
In many ways, choosing the beneficiary for your life insurance policy is similar to choosing the primary recipient of your will. However, there are many unique circumstances that can make this process more difficult. For example, if you hope for the benefits of your life insurance policy to be equally distributed among your children, then you may need to organize a policy with multiple—yet equal—primary beneficiaries.
Additionally, if you hope for your children to receive the benefits of your policy, but they are currently not old enough, then you may need to establish a trust where they will be able to access the funds once they have become of age. Usually, this age will be 18 or 21, depending on which state you live in. If you are currently in a unique financial or personal situation, then you may find it beneficial to speak with your life insurance agent, an estate planner, or another financial advisor.
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What Are Some Situations Where a Contingent Beneficiary May be Necessary?
Suppose that in the event of your death, you would want your wife, Heather, to receive the benefits of your life insurance policy. If she is your primary beneficiary, she will receive all of the benefits unless she is no longer around to accept them (suppose you both pass away together in a car accident). Naming a contingent or a secondary beneficiary will assure that in the event Heather is no longer around, then the benefits of your policy will still be distributed to someone you care about.
Most of the time, the benefits of your life insurance policy will be able to be seamlessly transferred to your primary beneficiary upon your death. However, as is the case with most financial assets, there are plenty of situations that can potentially complicate the transfer process.
Here are some possible scenarios that are frequently witnessed by life insurance providers:
* If your spouse is currently your primary beneficiary and you both pass away following the same event (such as a car accident), then the benefits of your life insurance policy will be transferred to your contingent beneficiary.
* If you and one of your primary beneficiaries pass away at the same time, but you still have other primary beneficiaries that are alive, then the benefits will be transferred to the remaining primary beneficiaries and your contingent beneficiary will receive nothing.
* If you would like for your contingent beneficiary to be “promoted” to being a primary beneficiary in the event that only one of your primary beneficiaries passes away, this is something that will need to be specifically clarified beforehand.
* If you, your primary beneficiary, and your contingent beneficiary all pass away, then your death benefits will likely need to be managed by an estate lawyer. In this rare instance, you may want to clarify a “backup” tertiary beneficiary before you pass away. You could also consider choosing a specific charity.
Naming Primary and Contingent Beneficiaries At the Right Time
Timing is also very important. For example, if your primary beneficiary passes away shortly after you, they may or may not have had time to reconsider where they would like the money to then be given. These cases can often be very complicated and unusual. Because of this, it is important that you develop a specific plan and work with a team of individuals who are familiar with these sorts of transfers.
Though naming a life insurance beneficiary might be something you assume you can just do later, there are very real consequences for not naming them right away. If you pass away, not naming a beneficiary can create a wide range of complications. Your life insurance company may not know who the death benefits should be distributed to and it may take significantly longer for them to be distributed. Because of this, it usually makes sense to name both a beneficiary and a contingent beneficiary as soon as you purchase a policy.
As you can see, despite life insurance’s apparent simplicities, there is still a wide range of possible complications you are likely to encounter. Your contingent beneficiary is an individual you will need to choose if your primary beneficiary is unable to receive the benefits of your life insurance policy. Choosing both your primary beneficiary and contingent beneficiaries are significant decisions and ones that you should probably take some time to think about.