What Is A Contingent Beneficiary?

Primary Beneficiaries differ significantly from Contingent Beneficiaries. Your contingent beneficiary might be thought of as your "backup plan". Read on to know more. 

When Arjun was asked to add beneficiaries to his insurance policy, he was confused. While he was sure that his wife would be his primary beneficiary – and eligible to receive all benefits in case of his untimely demise – he was clueless about what a contingency plan was? Should he be naming two or three beneficiaries? 

A contingent beneficiary is a person named in an insurance policy who will get the death benefit if the primary beneficiary is unable to do so. A contingent beneficiary can be an individual, an organisation, a charity or an estate.

Beneficiary Types: Primary versus Contingent

Beneficiaries who are ‘primary’ and those who are ‘contingent’ differ significantly. Your contingent beneficiary might be thought of as your "backup plan."

Determine who will be the primary beneficiary before you start choosing beneficiaries (you can have more than one). Your spouse is typically your primary beneficiary, and upon your passing, they will receive the death benefit from the insurance. If your primary beneficiary accepts the death benefit, the contingent beneficiary will not receive anything.

Let's use life insurance as an example to help us understand the concept.

According to Arjun's life insurance policy, his spouse will get the insurance proceeds in the case of his demise. Additionally, it states that the proceeds will go to Arjun's children if the spouse is deceased on the date of his death or before him.

Arjun's children are contingent beneficiaries in this example since their benefits are secondary to those of the primary beneficiary, Arjun's wife.

Why Is A Contingent Beneficiary Necessary?

A contingent beneficiary should always be selected. You should be ready for any curve balls that life may send your way. It's possible that your primary beneficiary won't be there when the death benefit is to be paid.

Suppose you choose your spouse as your primary beneficiary. And, God forbid, who receives the profits of your life insurance if he or she dies before you do? What happens to the death benefit? 

What will happen if you don’t choose a contingent beneficiary?

Your life insurance proceeds may be subject to substantial estate taxes. Here are a few possible scenarios.

If you didn't choose a contingent beneficiary and your primary beneficiary passed away, your death benefit will first go to your estate. When the death benefit from your life insurance is paid to your estate, estate taxes may apply. However, if you have a will or trust in place, this might be prevented.

Second, if you designated your spouse as the sole beneficiary of your life insurance policy (and have no contingent beneficiaries), your death benefit may be liable to estate taxes . If you merely select a contingent beneficiary, you won't need to pay these taxes.

Who can be a Contingent Beneficiary?

Any individual or organisation that qualifies as a primary beneficiary also qualifies as a contingent beneficiary. This comprises:

• Anyone, such as your partner, children, family members, or friends. No relation is necessary in order to designate someone as a beneficiary in your will.

• A nonprofit or charitable organisation. The fact that you can leave a portion of your fortune to a charity in your will surprises a lot of people. It's a meaningful, powerful method to leave a lasting legacy for both you and the causes that are most important to you.

Beneficiaries who receive an inheritance from a non-relative may be required to pay an inheritance tax on their assets in a few states. If you wish to include a non-relative as a beneficiary in your will, you might think about seeing an estate lawyer to learn about any potential tax repercussions. On the other hand, regardless of the state you reside in, any assets you leave directly to a charity are exempt from inheritance tax.

Remember when selecting beneficiaries that a minor usually cannot own property until they are an adult (which is usually at age 18). If you have young kids and wish to include them in your will as beneficiaries, you may also want to appoint a financial guardian who will handle their inheritance until they become adults.

The law considers pets to be property, thus you cannot name them as beneficiaries because they cannot inherit things directly (although you can set up a pet trust to provide for their care after your death).

What is the maximum number of contingent beneficiaries that can be named?

The number of contingent beneficiaries you choose is up to you, as is the distribution of your estate in whichever proportion you want. You might also name an organisation as a beneficiary rather than a person.

What kind of assets can you leave in your will for a contingent beneficiary?

You can specify a beneficiary in your will for any assets that are included in your probate estate. (Before your beneficiary can claim ownership of property in your "probate estate," it must first go through the probate process.)Because probate assets lack a survivorship element that would control their distribution upon death, it is chosen by probate court and is usually divided in accordance with the decedent's wishes. 

For every asset, you can specify a contingent beneficiary. This comprises:

• Real estate, such as your house
• Monetary resources such as cash, stocks, and bonds
• Personal belongings include your car, jewellery, works of art, furniture, and clothing
• Pets (which, although they frequently feel like members of the family, are legally regarded as property)
• Personal belongings or family heirlooms