When you open a retirement or other financial account or buy life insurance or an annuity, you're typically asked to designate primary beneficiaries—people or entities that inherit the associated assets when you die. You typically also have the option to designate contingent beneficiaries.
What is a contingent beneficiary, and how does a contingent beneficiary differ from a primary beneficiary? And do you really need to designate a contingent beneficiary at all? Read on to learn the answers, so you can make an informed decision about your legacy.
What is a contingent beneficiary?
A contingent beneficiary, sometimes referred to as a secondary beneficiary, is a person or institution you name in a beneficiary designation form filed with certain assets' custodians to inherit the associated asset after your death if your primary beneficiary predeceases you, or is unable to, or chooses not to accept the assets. Just as there are second people in line for government roles, contingent beneficiaries are second people in line to inherit assets. You get the option to select one or more primary and contingent beneficiaries with many kinds of accounts.
Primary vs. contingent beneficiary
A primary beneficiary is the first person(s) to receive an account benefit upon your death. A contingent beneficiary, on the other hand, is the person or entity you choose to inherit the account benefit in the event your primary beneficiaries have died, can't be located, or elect not to inherit the assets.
Important note: Contingent beneficiaries do not inherit assets unless all of the primary beneficiaries have passed away before the original account owner has passed or the primary beneficiaries elect not to receive assets. Also keep in mind that contingent beneficiaries don't get anything if there's at least one primary beneficiary who can receive assets.
What's a per stirpes contingent beneficiary?
Per stirpes generally indicates that if the named beneficiary dies, the children of that named beneficiary are to receive the benefits, or even the grandchildren of that named beneficiary if none of the beneficiary's children are alive. Keep in mind that a contingent beneficiary would only inherit assets if there is no per stirpes designation. Also note that it's important to read the beneficiary designation form to understand in detail how the per stirpes term is applied.
Why should you name a contingent beneficiary?
While you don't have to designate contingent beneficiaries, picking at least one may be a good idea because it helps ensure your assets go where you want once you're gone. If you don't designate contingent beneficiaries and your primary beneficiaries pass away before you do, then all assets in accounts with no contingent beneficiary, including any retirement accounts and life insurance policy death benefits, typically go to your estate. In that case, a state's laws of intestacy typically become responsible for divvying up the relevant assets unless you have a will, in which case a court will divide your assets up according to your will's terms.
Types of accounts that might need a contingent beneficiary
You can name contingent beneficiaries on many different types of accounts, including:
- employer-sponsored retirement accounts, such as a 401(k), 403(b), 457(b), SIMPLE IRA, or SIMPLE 401(k)
- individual retirement accounts, such as an IRA, SEP IRA, or Solo 401(k)
- life insurance policies, including term and whole life policies
- annuity contracts
- transfer on death (TOD) designated brokerage accounts. For an individual account, a TOD registration generally allows your ownership of the account to be transferred to the designated beneficiary upon your death.
Can you have more than one contingent beneficiary?
Yes, accounts can allow you to name multiple contingent beneficiaries. If you opt to designate multiple contingent beneficiaries, adding a percentage allocable to each beneficiary is generally required.
For example, if you list 3 contingent beneficiaries on your life insurance policy, you might decide to leave them each an equal share of the death benefit. In this case, each beneficiary would receive roughly 33.3% of the policy. However, you don't have to split things equally. You might instead decide to leave, say, 50% of the death benefit to a single beneficiary, with the other 2 receiving 25% each. As long as the percentages add up to 100%, you can split your assets however you wish. Just don't factor primary beneficiaries into the contingent beneficiary calculation—and vice versa.
Who should you designate as a contingent beneficiary?
Before addressing this, let's first go over primary beneficiaries. In most cases, it makes sense to select the people you're closest to or organizations you care most about as your primary beneficiaries. They might include the following:
- a spouse
- children
- grandchildren
- parents
- siblings
- nieces and nephews
- godchildren
- close friends
- favorite charities, such as a school or place of worship
Contingent beneficiaries tend to fall into the same basic buckets. So how do you decide who goes where? One example: You might select your spouse as the primary beneficiary on your retirement account or life insurance policy and designate adult children as contingent beneficiaries. If your spouse has already died, or if you're divorced, you might list your children as primary beneficiaries and maybe siblings or nieces and nephews as contingent beneficiaries.
How to add or change a contingent beneficiary
In many cases, you're prompted to choose primary and contingent beneficiaries when you open an investment account or buy a life insurance policy or annuity contract. Generally, you'll be prompted to provide some identifying information for your primary and/or contingent beneficiary that could include their full legal name, date of birth, relationship to you, Social Security number or tax ID, address, email, and/or phone number.
Major life changes are a good time to revisit your list of beneficiaries. You might revisit your beneficiaries when:
- You begin or end a long-term partnership, for example, when you get married or divorced
- You add children to your family
- A loved one passes away