When you buy a life insurance policy, the purpose is to help financially protect the ones you love. In the application process, you’ll be asked to name a primary beneficiary (or multiple if you choose) and a contingent beneficiary if there is one. This is an important step – arguably the most important step – because it’s your beneficiary designation of who the proceeds of your life insurance policy should go to if you die.
Since the point of life insurance is to make life less hard for those you leave behind if something happened to you, you’ll want to make sure you properly elect the people who you wish to receive the proceeds.
Learn what a beneficiary is, how a primary beneficiary differs from a contingent beneficiary and who you could name as yours.
What is a beneficiary?
A life insurance beneficiary is a person who will receive the payout from a policy if you were to die. The proceeds from the payout, known as a death benefit, can be used to help pay for financial needs – those that come with death, such as funeral arrangements and other end-of-life expenses, along with day-to-day bills like the mortgage and child care.
You can name two (or more) people as beneficiaries, outlining the percentage of the policy payout each would be given. You can also name a contingent beneficiary, who could receive the death benefit if something happened to the primary beneficiary. Think of a contingent beneficiary as your “alternate.” With most life insurance policies, you can change your beneficiary designation at any time.
For some, designating two primary beneficiaries — say, a spouse or partner and a parent — may make sense, especially if both could face financial hardship. For others, one primary life insurance beneficiary, with a contingent beneficiary named, makes the most sense. The latter is what we commonly see at Haven Life.
You can have more than one primary beneficiary and more than one contingent beneficiary; you simply need to designate what percentage of your life insurance proceeds you want to allocate to each of your primary beneficiaries. Haven Life, for example, permits up to 10 primary beneficiaries and 10 contingent beneficiaries. No matter how many primary beneficiaries you have, the total percentage allocated must equal 100%. How you divide that 100% is up to you, the policyholder.
What is a primary beneficiary versus a contingent beneficiary?
A primary beneficiary is a designated individual, chosen by the policyholder, who would receive the proceeds of the policy if he or she were to die. When selecting a primary beneficiary, you can name a person or even a revocable trust (or living trust) or other legal entity. Most importantly, the primary beneficiary is the “first in line” to receive the death benefit.
Keep in mind that your primary beneficiary must be legally competent to accept the proceeds. This raises the question of whether it is possible to name minors as primary beneficiaries. The short answer is yes, as long as certain steps are taken. Learn more about naming a minor as primary beneficiary here.
Essentially, when setting up your life insurance policy, you’ll designate a primary beneficiary (typically your spouse or partner), who will receive all death benefit if you, well, die. (There’s no way to sugarcoat these things sometimes.)
Your contingent beneficiary would be your backup — this is the person who will receive the death benefit in the event that your primary beneficiary is unable to receive them.
If I have a primary beneficiary, why should I designate a contingent beneficiary?
Life is full of unexpected outcomes. Selecting a contingent beneficiary is a prudent way to protect yourself and your loved ones from a number of “what-if scenarios,” such as your primary beneficiary not being alive at the time a claim is made.
Another reason you would want a contingent beneficiary listed is to avoid the death benefit proceeds becoming payable to the insured person’s estate should your primary beneficiary not be around, where it may be subject to estate taxes and a delay in disbursing money. (Note: If you’ve already set up a living trust and/or have a will established, this might not be an issue.)
What’s the difference between a primary beneficiary and a contingent beneficiary?
While the primary beneficiary is “first in line” to receive the death benefit, the contingent beneficiary is second. If something were to happen to the primary beneficiary, then the proceeds would be paid to the contingent beneficiary. It’s common for policyholders to name their spouse or partner as the primary beneficiary and then their children as the contingent, for example. That way, if anything happened to both parents, the proceeds would go to the children or their guardian to manage.
Additionally, a contingent beneficiary helps for those “just in case” scenarios where there might be a situation that prevents your primary beneficiary from receiving the policy payout. For example:
- Primary beneficiary cannot be found
- Primary beneficiary refuses to accept the proceeds
- Primary beneficiary has predeceased the policyholder
How do I decide who to name my primary beneficiary?
For most people, they are buying a life insurance policy because they have someone in their mind who they want to financially protect – so often it’s a simple choice of who to name as a beneficiary. At Haven Life, we frequently see individuals name their significant other as the primary beneficiary, but your situation may be different. Alternative choices could be friends who are like family or even charitable organizations that have had an impact on your life.
What if I need to change my primary beneficiary designation?
It is important to review your beneficiary designations from time to time. This is especially true if you have a major life event such as marriage or divorce. If your life circumstances dictate a change in beneficiary designation, fear not. It is simple to change your beneficiary designation if needed. At Haven Life, this can be conveniently managed online.
Can I have more than one primary beneficiary?
You can have more than one primary beneficiary; you simply need to designate what percentage of your life insurance proceeds you want to allocate to each of your primary beneficiaries. Haven Life, for example, permits up to 10 primary beneficiaries and 10 contingent beneficiaries. No matter how many primary beneficiaries you have, the total percentage allocated must equal 100%. How you divide that 100% is up to you, the policyholder.
What if my primary beneficiary cannot be found?
If your primary beneficiary cannot be found when the time comes to receive a payout, the payout will go to your contingent beneficiary, if you have one. A contingent beneficiary steps in as the primary beneficiary if the primary beneficiary is no longer able to receive the benefit. Overall, this is why it’s important to not only name a primary beneficiary and contingent beneficiary, but to also review and update the beneficiary and his or her contact information periodically.
Protect your primary beneficiary with life insurance
At the end of the day, life insurance helps us leave a financial legacy to our loved ones after we are gone. Properly selecting, naming and notifying a beneficiary is the best way to help ensure your loved ones will receive the death benefit in a time-sensitive manner.
Haven Life Insurance Agency (Haven Life) does not provide tax, legal or investment advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, or investment advice. You should consult your own tax, legal, and investment advisors before engaging in any transaction. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel.