Why You Need a Contingent Beneficiary on Your Life Insurance

Forgetting to name a contingent beneficiary could come at a cost.

When purchasing life insurance, the choice of who to name as beneficiary is one of the most important decisions a person makes. A beneficiary is the person who receives the death benefit. The owner of a life insurance policy can name one or more individuals as beneficiaries, or could name organizations such as a preferred charity.

While most people buying a policy know the importance of selecting the right beneficiary, it's actually important not just to pick a primary beneficiary, but also to select a contingent beneficiary as well. Here's why.

What is a contingent beneficiary?

A contingent beneficiary is a person who will receive a life insurance death benefit in the event the primary beneficiary has passed away before the death benefit pays out.

For example, if a husband names his wife as a primary beneficiary and the husband and wife both pass away together in an automobile accident, the wife would not be alive to receive the death benefit. As a result, the contingent beneficiary would get the money instead.

Contingent beneficiaries can be anyone who the policyholder chooses -- just as the primary beneficiary can. A person who buys life insurance could name one or several people or organizations who gets the life insurance payout if the primary beneficiary has passed away before the insurer sends out the death benefit.

Why is it important to name a contingent beneficiary?

When buying life insurance, a policyholder is not typically required to select a contingent beneficiary. And if their primary beneficiary is alive, then not doing so isn't an issue. However, it can be difficult or impossible to predict the future, and most people shouldn't take a chance on their primary beneficiary outliving them.

Instead, they should name a contingent beneficiary in order to ensure they have full control over who gets the death benefit. Consumers who buy life insurance pay premiums -- often for many years -- in order to make sure the death benefit is available to provide for loved ones. It makes sense to ensure the money goes to an individual of their choosing.

If a policyholder dies without a contingent beneficiary and their primary beneficiary has already passed, then the death benefit ends up being paid to the estate of the deceased policyholder -- instead of to a chosen person. This can cause lots of issues.

Creditors may try to collect the money

If the death benefit is paid out to the policyholder's estate, it must be distributed through the probate process. Because of this, since the death benefit becomes part of the estate, creditors could try to collect money from it in the event there is more outstanding debt owed than other estate assets could pay. The money from the death benefit could be subject to estate taxes. And because it must go through probate court, the process of distributing the money could be slow -- and it could take months or even years for heirs to receive the money.

The person who gets the payout will also be determined either by the policyholder's will (if the policyholder specified who should get all estate assets) or by intestacy laws that control who inherits estate assets if the will doesn't specify who gets them.

Naming a contingent beneficiary is an easy way to avoid all these issues, and to ensure the money goes to a chosen person. It's worth taking the short time required to name someone to fulfill this role.