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primary beneficiary vs contingent beneficiary

Primary Beneficiary vs Contingent Beneficiary

One of the most important things you need to do while setting up a life insurance policy is to list a beneficiary or beneficiaries. This is to make sure that your death benefit goes to the right person or entity which you are most concerned with. 

There are two main types of beneficiaries: primary beneficiary and contingent beneficiary.  

In this article, we provide you with a guide that explains the difference between these two kinds of beneficiaries with some real-world examples. 

What is the difference between primary beneficiary and contingent beneficiary? 

A primary beneficiary is the first person or entity in line to receive the life insurance payout following your demise. Typically, you have the right to list more than one beneficiary and assign how the inheritance is going to be split among them.  

A contingent beneficiary is the second person or entity in line to get the face amount of your life insurance policy.  

In other words, the contingent beneficiary serves as the backup person or entity and function as a way to protect your assets from probate courts as long as the premature demise of your primary beneficiaries were to occur. 

The mere condition under which the contingent beneficiary is able to get the death benefit is as long as the primary beneficiary or beneficiaries have passed away before you or else they can’t be located. 

Let’s say you have two kids. You list your daughter as the primary or principal beneficiary and your son as the contingent one. This means that your daughter would get your assets following your demise if she does not die before you or cannot be located. If she does die before you, then your son, as the contingent beneficiary, would receive the full death benefit. 

As long as you list both of your children as primary beneficiaries, the life insurance payout would be split between them based on the proportions you have finalized on.  

Another example is that let’s assume you list your spouse as the primary beneficiary and your kids as contingent beneficiaries. This means that your kids would receive the death benefit as long as your spouse dies before you. 

Provided that you aimed to have both your spouse and kids get the death benefit, you need to list all of them as primary beneficiaries. Perhaps you would want to designate half of the life insurance payout to your spouse and a quarter each for your daughter and your son. 

Under this circumstance, as long as the death of your spouse happens before yours, your kids would stay the primary beneficiaries.   

Entitlement of Contingent Beneficiaries as Recipients for Your Life Insurance Payout 

First Case 

Your primary beneficiary dies first and your demise happens soon after that. Meanwhile, you have not listed another beneficiary yet. In this case, the death benefit of your life insurance policy goes to your estate.  

Second Case 

Following your death, your primary beneficiary makes a life insurance claim with the life insurer. The life insurance provider approves the claim. However, prior to the payout of the death benefit, your primary beneficiary prematurely dies. 

In this case, the life insurance payout goes to the estate of the primary beneficiary, despite your designation of a contingent beneficiary. 

Third Case 

Both you and your primary beneficiary die in an accident at the same time. Despite the trickiness of this case, the matter of who died first needs to be considered. 

As long as your primary beneficiary died even only a few minutes following your death, the life insurance payout will go to his or her estate, despite your listing of a contingent beneficiary. 

Provided that your primary beneficiary died a few minutes prior to your death, the life insurance payout will go to your contingent beneficiary if you had listed one. 

If there is no contingent beneficiary, the death benefit will go to your estate. 

Fourth Case 

Provided that you list many people as your primary beneficiaries and one of them dies soon after your death, the life insurance payout will be equally divided among them. 

For example, imagine you purchase a USD 500,000 life insurance policy and list your spouse and four kids as your beneficiaries. All five of your beneficiaries will get USD 100,000 each following your premature death. If your spouse dies shortly after your death, your kids will get USD 125,000 each.  

As long as your kids are minors when you die, a legal guardian will supervise their proportion of the life insurance payout until they turn 18 or 21 which is considered the adult age, depending on the country you reside in.