When you open a retirement or other financial account, buy life insurance or an annuity, or create a trust or will, you're typically asked to choose primary beneficiaries—people or entities that inherit your assets when you die. You may have the option to designate contingent beneficiaries.
What is a contingent beneficiary, and how does this 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 designate to inherit your assets 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 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 the benefit upon your death. A contingent beneficiary, on the other hand, is the person or entity you choose to inherit your assets in the event your primary beneficiaries have died, can't be located, or elect not to inherit your 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.
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 or when you do, then all assets, including any retirement accounts and life insurance policy death benefits, could go to your estate. In that case, a state's law of intestacy could become responsible for divvying up your assets unless you have a will in which case the court will divide your assets up according to your wishes.
Types of accounts that might need a contingent beneficiary
You can name contingent beneficiaries on many different types of accounts. This includes the following:
- 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
- transfer on death (TOD) designated brokerage accounts. For an individual account, a TOD registration generally allows you 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 is generally required if you are adding multiple beneficiaries for any account registration.
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. 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 in primary beneficiaries in the contingent beneficiary calculation—and vice versa.
What's a per stirpes contingent beneficiary?
Per stirpes 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 no children are alive. Keep in mind that a contingent beneficiary would only inherit assets if there is no Per Stirpes.
Not: Per stirpes does not include stepchildren (unless specifically referenced in the instrument) but does include legally adopted children.
Who should you name as a contingent beneficiary?
Before we talk about contingent beneficiaries, let's first go over primary beneficiaries. In most cases, it makes sense to select the people you are closest to or organizations you care most about as your primary beneficiaries. They might include the following:
- a spouse
- nieces and nephews
- close friends
- favorite charities
- institutions, 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 you're divorced, you might list your children as primary beneficiaries, and maybe siblings or nieces and nephews as contingent beneficiaries.
Ultimately, there's no right or wrong way to select 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 account or buy a life insurance policy. Generally, you'll be prompted to provide some identifying information for your primary and/or contingent beneficiary, which could include their full legal name, date of birth, relationship to you, Social Security number or tax ID, address, email, 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, such as getting married or divorced
- You add children to your family
- A loved one passes away, especially if they were listed as a beneficiary on an account