Primary vs. Contingent Beneficiary: What's the Difference?

When setting up a life insurance policy, an important aspect to understand is the difference between a primary versus a contingent beneficiary. Those you choose as your beneficiaries will be affected financially, so it's essential to consider it carefully.

It's also important to know who (and what) can be named a beneficiary as well as the possible tax benefits and consequences of the designations you decide upon. Here's a start on what you need to know plus some tips for naming a life insurance beneficiary.

The Main Roles in a Life Insurance Policy

Before getting into the differences between a primary versus a contingent beneficiary, it's important to understand the main roles of individuals or entities involved with an insurance policy contract. Knowing the function of each of these four roles can help prevent some confusion:

• Insured. The person the policy is purchased for. They are covered by the insurance contract. It's upon their death that the benefit amount will be paid to the policy's named beneficiaries. The insured's age, health information and lifestyle will generally determine the policy's premium.
• Owner. The person who owns and controls the policy during the lifetime of the insured. The policy owner has the power to make changes to the policy, such as naming and changing the beneficiaries. The insured and the policy owner can be the same person.
• Payor. A person or entity who pays for the life insurance policy. The policy payor can be the same as the policy owner as well as the insured.
• Beneficiary. The person or entity who receives the death benefit, which is paid out when the insured dies.

Differences Between a Primary vs. Contingent Beneficiary

Insurance policies and certain other financial instruments — such as individual retirement accounts and 401(k) plans — allow the owner of the policy or account to name one or more beneficiaries. With life insurance policies, beneficiaries are entitled to a death benefit when the insured dies.

Before purchasing an insurance policy, it's important to know the difference between a primary and a contingent beneficiary:

• Primary beneficiary. The person or entity who receives the death benefit when the insured dies.
• Contingent beneficiary. A person or entity who receives the death benefit if the primary beneficiary is unable to receive the proceeds.

So, if you pass away, the primary beneficiary would be the first in line to receive your life insurance death benefit. However, if that individual or organization is no longer living or is otherwise incapable of accepting the death benefit at the time of your passing, the named contingent would receive the benefit.

When to Name a Primary vs. Contingent Beneficiary

If you're only naming one beneficiary, then you don't need to choose; that person or entity automatically is the primary beneficiary. However, if you can and want to name more, then you have the choice of naming either multiple primary beneficiaries or a combination of primary and contingent beneficiaries.

For example, a married couple with no children may each decide to buy life insurance, naming each other the primary beneficiary on their respective policies. When one spouse dies, the surviving spouse will receive 100% of the death benefit of the spouse who died.

If that same couple later has children, they may name their children as contingent beneficiaries.

Who or What Can Be a Life Insurance Beneficiary?

Life insurance policyholders typically have a significant amount of flexibility when choosing beneficiaries. Here are some examples of who or what can be a primary or contingent life insurance beneficiary:

• Spouses. Married couples commonly name each other to be the primary beneficiary.
• Children. Kids are often named as contingent beneficiaries with the insured's spouse as the primary, but children can also be primary beneficiaries.
• Other relatives. An insured may decide to choose family members other than their spouse or children to be beneficiaries.
• Nonrelatives. There is no requirement to name a family member as a life insurance beneficiary; anyone can be designated.
• Trusts. In some cases, it makes sense to name a legal entity called a trust as a beneficiary. For example, if you want minor children to receive the death benefit, you can make a trust the beneficiary, and a trustee will manage the proceeds on their behalf.
• Organizations. Similar to naming a trust as beneficiary, you can choose an organization, such as a charity, nonprofit or even a business, as either a primary or contingent beneficiary.

You have many options for beneficiaries. Accordingly, it can be beneficial to seek out the guidance of a financial professional with expertise on insurance products before buying a policy.

What Are the Rights of a Life Insurance Beneficiary?

The beneficiary of a life insurance policy has a right to:

• Be notified that they are the beneficiary of the life insurance policy when the insured person dies
• Receive assistance with filing a claim for the death benefit
• See all documents that an insurance company used when reviewing a claim
• Receive an explanation for why a death benefit claim has been delayed or denied
• Appeal a claim that has been denied and be instructed on how to file the appeal

Per Stirpes vs. Per Capita Benefit Distribution

The distribution of your death benefit can either be per stirpes or per capita, so it's important to know the difference between these two arrangements.

Per stirpes is Latin for "by branch." It means the benefit should be distributed equally to the descendants of a primary beneficiary if the primary beneficiary has died before you. Per capita, which is Latin for "by head," means that only surviving beneficiaries are entitled to the death benefit.

Let's say that you name your two adult children as primary beneficiaries at 50% each using a per stirpes arrangement and one of them dies before you. The surviving beneficiary would get their 50% share, and the deceased beneficiary's descendants would receive the other 50% to be distributed equally among them.

Using the same example with a per capita arrangement, 100% of the death benefit would be paid to the surviving primary beneficiary. Nothing would go to the deceased beneficiary's descendants.

How & When Are Life Insurance Benefits Paid?

Not all life insurance policies have the same rules for benefit payouts. Before you buy life insurance, it's important to understand the details about how and when life insurance benefits are paid. Specific details you should look into include:

• Whether a reduced death benefit may apply. Some life insurance policies designate a period of time following issue during which the entire death benefit might not be paid. So if you had one of these policies and were to die during the initial years of the contract, your beneficiaries would receive only a portion of the death benefit, or potentially only premiums paid.
• When the death benefit will be paid out. Your death benefit will be paid to beneficiaries after you die, but it may take anywhere from a few days to a few weeks to process. The timeliness depends on both the insurance company and how prepared your beneficiaries are in claiming the benefit. They'll need to be ready to provide documentation, such as a death certificate, and sometimes a copy of the policy before benefits are paid.
• What might prevent a life insurance payout. You'll want to know what circumstances would prevent your beneficiaries from receiving a death benefit. Typically, if you die from something not covered by the policy or if the policy lapses because you stopped paying the premium, the benefit will not be paid.
• How your family will receive the death benefit. Beneficiaries usually get to choose how to receive the death benefit — in a lump sum distribution, by monthly payments or via an interest-bearing account retained with the life insurance company. 

Tips for Naming Life Insurance Beneficiaries

When naming life insurance beneficiaries, here are eight important points to keep in mind:

• Read the form carefully. Not all beneficiary forms are designed the same. It's critical to read your form carefully and avoid filling in names and percentages without double-checking the wording.
• Always name a beneficiary. If you die without a beneficiary, the policy may have to go through the probate process, which can result in additional costs, unnecessary delays and potentially unfavorable taxation.
• Name both primary and contingent beneficiaries. It's a good idea to name a contingent beneficiary in the event the primary beneficiary dies and you have distinct intentions about the next person in line for your death benefit. If there's only one person you want to name, consider whether an organization, such as a nonprofit, would be appropriate as your contingent beneficiary. This can help ensure the money you leave behind goes toward the people and causes you care about most.
• Consider tax benefits and consequences. Generally, beneficiaries of a life insurance policy do not pay taxes on the death benefit. However, if you name an estate rather than an individual, the people who end up inheriting the estate may have to pay estate taxes.
• Update your policy for life events. Review your beneficiary designations on a regular basis and update them when necessary, especially after a major life event, such as a birth, death, marriage or divorce. A related consideration is that most life insurance policies will not allow you to directly leave money to beneficiaries who are minors.
• Coordinate beneficiaries with your will or trust. Typically, death benefits from a life insurance policy bypass the probate process and go directly to beneficiaries. This means beneficiary designations are often independent from the rest of your estate planning documents. It's important to understand how the different parts operate as a whole and plan according to your wishes.
• Avoid naming your estate as your beneficiary. When possible, it's generally easiest to have assets pass directly to named beneficiaries rather than have the assets go through probate court, which can result in benefits being allotted differently than you intended.
• Trusts are generally not ideal as life insurance beneficiaries. If it makes sense for a trustee to control life insurance proceeds from a death benefit rather than, say, a minor child, you might consider naming a trust as beneficiary. However, this may not be your only or best option. It's a good idea to consult your estate attorney, CPA or financial advisor before naming a trust as a beneficiary.

Bottom Line

There are many different choices for selecting beneficiaries on a life insurance policy. There are also a lot of questions to consider. Who or what will you name as beneficiary? How do you assign the right primary and contingent beneficiaries? What are the tax consequences of your decisions?

Knowing that the choices you make can have significant financial implications for your estate and your family, consider contacting a financial professional for assistance. A qualified individual can take a personalized look at your particular situation and offer customized insights.