What Is a Contingent Beneficiary?

Lynda Taylor is an assistant director in Risk Product Development at Northwestern Mutual.

Your beneficiaries are an important part of your life insurance application. After all, the main purpose of life insurance is to leave behind a death benefit when you pass way—so you want to make sure the benefit is going to the people you intend it to. The insurance company will follow your instructions, so it’s critical that you clearly name not only who you want to benefit from your legacy but also a backup, or “contingent,” beneficiary.

Here we’ll share the important details about contingent beneficiaries, why choosing a contingent beneficiary is important, and a few tips for selecting one.

What is a contingent beneficiary?

When you pass away, the life insurance company sends money to the primary beneficiary on your policy. Another way to refer to that person is the “direct beneficiary.” If that beneficiary has died, cannot be found or (in rare instances) refuses the payout, the insurance company will send the money to a backup beneficiary, also known as the contingent beneficiary.

If you don’t have a contingent beneficiary on file with your insurance company, and your primary beneficiary is deceased or can’t be located, then your case will go to probate court. This happens even if you have a will. A judge will decide who gets the money, which can take time and use up some of the inheritance.

Who can be named a contingent beneficiary?

You can name anyone you’d like as a beneficiary—primary or contingent. For example, you might make your spouse the primary beneficiary and your children the contingent beneficiaries. Or you might specify your spouse as the primary beneficiary and split the contingent beneficiaries, for example, with 60 percent to your children and 40 percent to a charity. You have a lot of options.

People who are single and don’t have children might name their parents, nieces, nephews or even close friends or roommates as primary beneficiaries. (And, if you’ve heard of people leaving money to their pets, yes, it can be done through a trust.)

Can you have more than one contingent beneficiary?

You can have more than one beneficiary and more than one contingent beneficiary. For example, it’s common to name multiple children as contingent beneficiaries. You decide how the death benefit is split—so you could leave one beneficiary a higher percentage of your death benefit. You can also have your benefit split equally among all beneficiaries.

• You’ll need to designate a custodian or trustee to manage the money for any minor children (under age 18). Later, they can take on the management of their inheritance at an age you specify.
• You can set additional milestones around your contingent beneficiary’s inheritance. For example, you could require that a child complete a level of education or be employed before getting their portion of your death benefit.
• If you think you might have more children in the future, talk to an expert about how to make sure they are included in your death benefit proceeds. The phrase “per stirpes” is sometimes used to indicate that benefits should be divided equally among children, even if they are not yet born when the document is signed.
• When you have a new baby or adopt a child, update your beneficiaries—on life insurance and other financial products.
• Remember to update each policy you own, including those provided by your employer and policies you’ve purchased on your own.

Sometimes you can name a third level of beneficiary. This beneficiary might be called a “further payee” and would get the death benefit if all the primary and contingent beneficiaries have died, cannot be found or (in rare instances) refuse the payout. You could think of this as a “backup to the backup.”

How does divorce affect beneficiaries?

A divorce is an important change in your financial picture. If you get divorced after you have set up your beneficiaries, you may want to update your beneficiary designations. It’s common to remove a former spouse and make children the new primary beneficiaries. Perhaps a nonprofit becomes the new contingent beneficiary.

It’s fine to keep the former spouse if that’s your preference. In some states, a divorce will automatically remove your ex-spouse as the beneficiary—unless there is a written agreement to keep your ex-spouse as beneficiary.

What are beneficiaries in estate planning?

We’ve primarily discussed contingent beneficiaries for life insurance, but the concept is similar in estate planning. In your estate plan, your contingent beneficiary is the person or organization that would get your assets if the primary beneficiary has passed away, cannot be located or refuses the inheritance.

When creating your estate plan, make sure that you have designated primary and contingent beneficiaries on your bank accounts, brokerage accounts, retirement accounts (like 401(k)s and IRAs), life insurance policies and certain annuities. Remember that beneficiary designations override the instructions in a will, so you’ll want to have them updated with each institution and review them periodically to ensure that they still reflect your wishes.  

When it comes to estate planning, you can name more than one person or organization as the beneficiary of your estate. You can also designate percentages, such as 80 percent to a relative and 20 percent to a charity. Remember that any money left to minor children will need to be handled by a custodian or trust until the child reaches adulthood.

Do I need to have a contingent beneficiary?

A contingent beneficiary is not technically required, but we highly recommend that you name at least one. It helps make sure that when you’re gone, your death benefit reaches the right people or organizations.

Naming a contingent beneficiary doesn’t take long, and many companies, including ours, provide a way to update life insurance beneficiaries online. The time you spend can make a huge difference for your loved ones.

As you think through who to name as your beneficiaries, consider talking with a Northwestern Mutual financial advisor. Your advisor can help you understand the terms of your policy as well as help you start estate planning to make sure you have enough financial protection for your family. They can also take you through other financial considerations, looking at opportunities and blind spots to further protect and grow your legacy.