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What is a contingent beneficiary in life insurance?
Life insurance is an important product that can help provide financial security to your loved ones, should you pass away. This financial support comes in the form of the policy's life insurance benefit, which is paid to the named beneficiary(ies) or estate when the insured passes away.
The policy owner has the option to name both a primary beneficiary and a contingent beneficiary, which is recommended, so that the policy's life insurance benefit is more likely to be distributed per the policy owner’s wishes. It's advised to name your beneficiaries during the application process. That said, they can be named at a later date.
The primary beneficiary (commonly a spouse / children) is the first in line to receive the policy's life insurance benefit. The contingent beneficiary, sometimes referred to as a secondary beneficiary, is the alternate to the primary beneficiary. They receive the policy's life insurance benefit in the event the primary beneficiary passes away before the insured person, who also passes away.
In this article, we'll explore:
What is a contingent beneficiary?
A contingent beneficiary is the individual or entity named by the policy owner to receive the policy’s life insurance benefit if the primary beneficiaries are not alive at the time of the insured’s person’s death. Examples of an entity could be charities, churches, businesses, or institutes of higher learning.
What is the difference between a primary beneficiary and a contingent beneficiary?
A primary beneficiary is the individual or entity designated to receive the life insurance benefit upon the insured person's death. If the primary beneficiary is alive at the time of the life insured's death, they receive the funds.
The contingent beneficiary is the alternate recipient. The contingent beneficiary only receives the life insurance benefit if the primary beneficiary is not alive.
Why is naming a contingent beneficiary important?
Having a contingent beneficiary helps ensure that the policy's life insurance benefit goes to an intended recipient, named by the policy owner, if the primary beneficiary cannot receive it.
2 contingent beneficiary scenarios
Let's take a closer look at two potential scenarios that illustrate why having a contingent beneficiary may be helpful.
Scenario 1: Primary beneficiary passes away
Gabriela loses her husband. On her life insurance policy, he was the named primary beneficiary. After his death, Gabriela did not update her life insurance policy with a new primary beneficiary. Eventually, she also passes away. In this scenario, the life insurance benefit would go to the named contingent beneficiary, their 30-year-old son, which is what Gabriela and her husband would have wanted.
Scenario 2: Contingent beneficiary is a minor
Ram and Sunita (husband and wife) both unexpectedly pass away. Ram had a life insurance policy, and he had named Sunita as his primary beneficiary. Ram also made sure to name a contingent beneficiary, their younger daughter.
In this scenario, because the daughter is only 15 years old, the life insurance policy payout will be managed by his named trustee for their daughter until she reaches the age of majority. By naming his daughter as the contingent beneficiary, Ram's wishes are preserved.
Choosing a contingent beneficiary: A few considerations when naming a contingent beneficiary.
Selecting a contingent beneficiary is no small decision, so be sure to weigh the following considerations.
1. Relationship to you: Often, a policy owner selects a trustworthy family member or a close friend who is like family.
2. A trust or organization: You also have the option to name a trust, charity, or organization. Naming a charity or organization can be a good idea if you're looking to support a cause that you're passionate about.
3. Age: If your contingent beneficiary is a minor, you may want to consider creating a trust or naming a trustee to manage the funds until they reach the age of majority. In Canada, the age of majority is 18 or 19 years old depending on the province or territory.
4. Changing circumstances: Life circumstances are constantly changing (marriage, divorce, deaths, births), so be sure to review and update your contingent beneficiary as needed.
5. Distribution preferences: If you want to divide the life insurance benefit between multiple contingent beneficiaries, it's important to specify what percentage each person will receive.
We hope you've gained a better understanding of what a contingent beneficiary is and why it can be a good idea to name one. Now, why not take a moment to review the primary and contingent beneficiary(ies) listed on your life insurance policy?
Interested in learning more about life insurance and the coverage that TD Life Insurance offers? You can visit us online to review the plans available to you.
Can I name more than one contingent beneficiary?
Yes.
If you name multiple contingent beneficiaries, you'll need to specify what percentage of the policy's life insurance benefit each of them shall receive. The total number of contingent beneficiaries that can be listed depends on the life insurance company and the terms of the policy.
Can I change my beneficiary?
Yes, you can. To do this, follow the process outlined by your life insurance company.
However, if the existing beneficiary has an irrevocable beneficiary designation, the beneficiary's consent is required to be obtained by the policy owner to make any kind of change to the policy, including a beneficiary change.
Can a contingent beneficiary be a minor?
Yes.
However, there are some important considerations to note. If the minor inherits the life insurance benefit, a named trustee may need to be appointed to manage the funds until they reach the age of majority. In Canada, the age of majority is 18 or 19 years old depending on the province / territory.
What happens if there is no contingent beneficiary named?
In cases where the policy benefit cannot be paid to the primary beneficiary(ies) and a contingent beneficiary isn’t named on the policy, the life insurance benefit becomes part of the policy owner's estate.
What happens if the primary beneficiary and contingent beneficiaries die before the insured?
If both the primary beneficiary and contingent beneficiaries pass away before the insured, and the policy owner does not name new beneficiaries, the life insurance benefit will typically go to the policy owner's estate. The funds will then be distributed in accordance with the instructions in the policy owner's will. If there's no will, the funds will be administered and distributed through the estate settlement.
That's why it's a good idea to regularly review and update your beneficiary designations, including naming contingent beneficiary(ies) or creating a trust.
When should I update my contingent beneficiary?
It's important to keep your beneficiary designations up to date, especially after major life events like a marriage, divorce, the birth of a child, or the death of a beneficiary.
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The content on this page is for general information purposes only and does not constitute legal, financial or insurance advice. In the case of conflict between the content on this page and your insurance contract, your contract shall govern. Speak to a TD Life Insurance licensed advisor regarding your specific situation. The information contained herein, is subject to change without notice.