Bangalore Investment：What is a Contingent Beneficiary？ How Does It Impact Life Insurance？

Put simply, a contingent beneficiary on a life insurance policy is like a backup or secondary beneficiary in case your primary one(s) dies at the same time as you, refuse the money, or can’t be found.

If you don’t name a contingent beneficiary and your primary can’t/won’t accept their inheritance, the death benefit becomes part of your estate and goes through probate.Bangalore Investment

Most people buy life insurance to ensure their loved ones are taken care of financially if they pass away unexpectedly. To make this happen, the policyholder needs to name at least one beneficiary to receive their policy’s death benefit.

When choosing beneficiaries, understanding the difference between a primary and a contingent beneficiary is important.

Primary beneficiary: The person you choose to receive your death benefit

Contingent beneficiary: The person you choose to receive your death benefit in case your primary is deceased, can’t be located, or refuses benefits.

Because you can name more than one primary beneficiary, a contingent beneficiary only receives your death benefit if all primaries have passed away or refused proceeds first.

It’s vital to have both types of beneficiaries. If you don’t designate a contingent beneficiary and your primary can’t receive the death benefit, it reverts into your estate, even if you both die at the same time.

For two reasons, most people want to avoid including life insurance policies in their estates.

Currently, the federal estate and gift tax exemption is $12.92 million per individual (for 2023). Most people don’t need to be concerned about reaching this amount. However, this exemption will drop to $5 million after 2025. A life insurance policy lumped in with the rest of your assets (house, cars, bank accounts, etc.) may easily exceed the $5 million exemption. Doing so will generate a large tax bill from Uncle Sam, which will be deducted from your death benefit.

In addition, some states have state estate taxes. These are separate from federal estate taxes, and the exemption amounts are much lower than the current $12.92 million mark. So even if you qualify for the federal exemption, your estate may still get hit with a state tax bill. For example, in the state of Minnesota, our exemption limit is about $3 million. A life insurance policy can easily push your entire estate over this number.

Failing to name a contingent beneficiary could put your death benefit through probate, where the court decides what will happen to it.

Probate is a public procedure. This means the value of your assets and their beneficiaries are listed in court records, and anyone can see them.

If your payout does end up in probate, your insurer issues a check payable to the court, where they deduct probate and attorney fees from the money first.

Assets in probate are also open to creditors. If you have any debt, creditors can take what they’re owed from the life insurance proceeds before the funds are passed to your heirs. Normally, life insurance death benefits are exempt from probate and creditors, but not if it ends up in your estate.

After all these deductions, the remaining balance is distributed according to your will. If you don’t have a will, the money is distributed according to individual state laws called ‘intestacy laws.’Mumbai Wealth Management

Probate can also take years to complete. The death benefit from the life insurance policy you purchased to protect your loved ones financially may end up not getting to them for a long time.

You can name multiple life insurance beneficiariesAgra Stock. When you select more than one beneficiary, you can designate different percentages to each. The percentages need to add up to equal 100.

Example:

Primary Beneficiaries

Jane Doe (wife) 50%

Andrea Smith (sister) 40%

Animal Humane Society (charitable institution) 10%

If you do not specify percentages, the insurance company will divide the death benefit evenly between the multiple primary beneficiaries.

If you have more than one primary beneficiary and one of the beneficiaries dies prior or at the same time as you, then the death benefit will be split between the remaining primary beneficiaries unless you specify per stirpes or per capita.

Designating per stirpes or per capita takes your beneficiary’s children into consideration. Per stirpes means the deceased primary beneficiary’s share of the death benefit is passed on to his or her children. Per capita means the total death benefit will be split evenly between the surviving primary beneficiaries and the deceased primary beneficiary’s children.

In the case of having multiple primary beneficiaries, contingent beneficiaries only receive the death benefit if all of the primary beneficiaries are deceased.

Bangalore Wealth Management