Rights of Contingent Beneficiary vs. Primary Beneficiary

How to ensure your assets go where you intend them to go upon your death.

Nov 15, 2015 at 12:07AM

If you've filled out paperwork for life insurance or a retirement account, you've probably come across the terms "primary" and "contingent" beneficiary. But what's the difference between the two concepts, and how do their rights affect the transfer of assets?

First, let's define the word that they both have in common: "beneficiary." A beneficiary is any person, trust, or entity that is designated by the financial account holder to receive some portion of the assets in the account after he or she dies.

Contingent vs. primary beneficiary
A primary beneficiary is simply first in line to receive the assets in the account, while the contingent beneficiary is next in line. There can be multiple primary and contingent beneficiaries, but contingent beneficiaries only receive their benefits in the event that none of the primary beneficiaries survive the account holder.

Here's a simple example.

A man passes away after accumulating $100,000 in a retirement account. He originally named his wife and brother as 50/50 primary beneficiaries but did not make any change to this designation after his brother passed away. The account holder also named his three adult children as contingent beneficiaries. In this instance, the man's wife would be first in line to receive all of the assets because of her status as a primary beneficiary.

Of course, the beneficiary designation process can get much more complicated from here -- by including trusts or by attaching conditions on a beneficiary's status, to name just two examples. But in each case the key distinction remains the same: Primary beneficiaries have first claim on the asset upon the account holder's death.

Why you should name beneficiaries
Even though naming a beneficiary, either primary or contingent, is optional for many retirement and insurance accounts, it's generally recommended that you take the time to do it. Otherwise, your passing might cause unnecessary probate expenses and delays for the heirs you intended to receive your assets.

It also might trigger a costly liquidation process. Many retirement accounts, for example, allow spousal beneficiaries to transfer an IRA into their own name and therefore delay required distributions until after age 70. Non-spousal beneficiaries, by contrast, are often required to begin taking distributions from the account immediately, which would lower the amount of time the assets can generate tax-differed growth. That's why it's important to be clear about whom you designate as your primary and contingent beneficiaries.

Common issues
According to a recent study by the U.S. Department of Labor, these are the two most common issues that can create disputes among heirs to an estate but are also in the account owner's power to avoid ahead of time:

  • Failing to change beneficiary designations to reflect life events. For example, after a marriage or divorce, many people forget to update their desired beneficiaries accordingly. Failing to do so can result in legal conflicts between current or ex-spouses and other potential beneficiaries.
  • Electing an impermissible beneficiary. A beneficiary must have the legal power to accept the asset that you've assigned to that person upon your death. That means that minor children and pets are won't work. For minors, the money will instead go to a legal guardian until the beneficiary reaches 18 or 21, depending on state law. In general, naming an entity that can't claim your asset will result in delays as the account manager works to establish the next legally appropriate beneficiary.

You can avoid these complications by taking the time to name primary and contingent beneficiaries when you open any financial account, and by periodically reviewing these designations to ensure that they still reflect your current wishes.

The $15,978 Social Security bonus most retirees completely overlook
If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. In fact, one MarketWatch reporter argues that if more Americans knew about this, the government would have to shell out an extra $10 billion annually. For example: one easy, 17-minute trick could pay you as much as $15,978 more... each year! Once you learn how to take advantage of all these loopholes, we think you could retire confidently with the peace of mind we're all after. Simply click here to discover how you can take advantage of these strategies.

This article is part of The Motley Fool's Knowledge Center, which was created based on the collected wisdom of a fantastic community of investors based in the Foolsaurus. Pop on over there to learn more about our Wiki and how you can be involved in helping the world invest, better! If you see any issues with this page, please email us at knowledgecenter@fool.com. Thanks -- and Fool on!

Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers