Life Insurance Primary Vs. Contingent Beneficiaries

2019/02/25

Whenever you take  life insurance or open an account, you are generally asked to fill out beneficiary details. Your employer may also ask you to name the beneficiaries for your retirement saving plan. Though not mandatory, it is advisable to fill that information.

By providing this information, applicant to an account or to an insurance policy instructs the bank, or to his/her employer or to the insurance company as to who should receive the proceeds or assets in case of his/her death. This can avoid the complications associated with the probate process thereby simplifying the transfer process for the entitled beneficiaries.

Beneficiary can be an individual or an entity. A primary beneficiary is one who will have first right over the proceeds or assets of the deceased person. A contingent beneficiary is one who will receive the proceeds after primary beneficiary has died or has declined to accept the benefit in his/her favour. It is even possible to specify the percentage that each primary or contingent beneficiary will receive in the event of death. Multiple beneficiaries can also be mentioned for both the categories.

Let us understand the concept of primary and contingent beneficiary with the help of an example:

You are single (unmarried) and you have taken a life insurance policy. Now you have to fill a beneficiary and a contingent beneficiary as a part of your policy. Our first instinct is always to mention our parent’s name. However it is not mandatory. You can also mention your brother or sister’s name. If all are included in primary beneficiary, entire amount would get disbursed to these beneficiaries in the percentage you mentioned on the policy form.

For Instance, you have taken a life insurance policy worth $ 10,000 and you have mentioned your father, your brother and sister as primary beneficiaries. You have specified that each one of these beneficiaries would receive 33% of the death benefits. As a result, each of them would be entitled to around $ 3,333 directly. In case a different percentage was specified, funds would be distributed in that percentage only.

On the other hand, let us take a scenario where you mentioned your brother and sister as contingent beneficiaries with equal share (50%). In this case they would be entitled to receive their respective shares only after primary beneficiary has expired or has declined to accept the entitled benefit.

A married individual on the other hand may prefer to mention his or her spouse or children as beneficiaries. Here, spouse may be specified as primary beneficiary and children as contingent beneficiaries.

Not only this, you can also mention a charity or institution’s name with which you have been associated for long as the beneficiary (primary or secondary) and wish to contribute a portion of your estate to it.

Objective behind mentioning beneficiaries is to ensure that the funds are transferred to the close and loved ones without too much hassle.

So make sure that next time you are going in for a policy or an account for yourself or for someone known to you, do include beneficiary details, if possible at both the levels of primary and contingent.

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