What is a Contingent Beneficiary and why is it so important?

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Thinking about their death benefit, life insurance policies, or best coverage options may be a little inconvenient to some people. However, you should realize that making all vital decisions as soon as possible takes the weight off your shoulders. Creating your will and choosing beneficiaries in advance will definitely make you and your loved ones feel safer and prepared.

Whether you are still young or already past your prime, it is never too late to start caring about your loved ones. Creating a will differs from filling out a beneficiary designation form. The second one, being a relatively complex issue, sometimes puts off prospective stakeholders. Besides naming primary beneficiaries, there are few more aspects you need to remember. Therefore, we are coming to provide all the help you may need. In today’s article, we will discuss the concept of the contingent beneficiary and explain everything you have to know.

We will cover:

  • Difference between a will and beneficiary designation
  • Types of beneficiaries
  • Who can be a contingent beneficiary?
  • Why is naming one so important?
  • The revolutionary approach of the Infinite Banking Concept

But before we get into the details, let’s get familiar with a few basic terms from the life insurance world.

Glossary

Annuities

Annuities are financial institution-issued and distributed (or sold) contracts in which money is invested to pay out a set income stream in the future. They are primarily used for retirement planning and to mitigate the danger of outliving one’s savings. Following annuity, the holding institution will provide a stream of payments at a later date. (Based on Investopedia explanation)

Beneficiary

Any person who obtains an advantage and earns from anything is referred to as a beneficiary. A beneficiary in the financial sector is someone who is entitled to receive distributions from a trust, will, or life insurance policy. Heirs are either directly mentioned in these documents or have satisfied the requirements that make them eligible for the distribution. (Based on Investopedia explanation)

Beneficiary designation form

A designated beneficiary is someone who is identified on a life insurance policy or a financial account as the person who will get the assets if the account holder dies. A live person is a designated beneficiary. To obtain the support, the named beneficiary must usually file a claim with a copy of the death certificate. (Based on Investopedia explanation)

An example of a beneficiary designation form (Image source)

Legal guardian

A legal guardian is someone who has been appointed by a court or otherwise has the legal authority (and related responsibility) to look after the personal and property interests of another person, known as a ward. Guardianship for a dependent elder (due to old age or infirmity), guardianship for minor children, and guardianship for developmentally disabled people are the most common uses for guardians. Though the responsibilities may be comparable, a parent of a child is not usually considered a guardian. The most common guardian is a family member. However, if a qualified family member is unavailable, a professional guardian or public trustee may be appointed. (Based on Wikipedia explanation)

Probate process

Probate is a legal procedure for distributing the assets of a deceased individual. The procedure is overseen by a probate court. This court has the legal authority to rule on wills and estates. During probate, the court will determine if the will is valid. They’ll also choose an executor, locate and appraise assets, and use the estate to pay the decedent’s debts. The remaining will be distributed to the heirs and beneficiaries of the deceased.

The probate process differs from one state to the next. In California, for example, estates under a specific value can be passed to heirs through a simplified method. The heirs might ask the court to “put aside” the estate if the property is worth less than $20,000.This entails completing a form.

In case the value of the estate is below $165,250, it can be arranged that the heirs have that estate distributed to them. Though it is a more complex and time-consuming procedure than in the case of a less worthy estate, it is still much easier than the court-supervised probate process. (Based on The Balance explanation)

Will

A legal document in which a person specifies what should happen to their money and possessions once they pass away. (Based on Cambridge Dictionary definition)

The difference between a will and beneficiary designation

The difference between those two documents lies in their basic definition. A beneficiary designation is a document pointing to people who are identified on a life insurance policy, retirement account, living trust, or financial account as the person who will get the assets if the account holder dies. A live person is a designated beneficiary. To obtain the support, the named beneficiary must usually file a claim with a copy of the death certificate.

On the other hand, a will is an estate planning document that includes all of the suggestions and wishes of the deceased one. It points to the heirs and provides the instruction of distributing one’s assets to their loved ones.

So, both beneficiary designation and will point to the people receiving the payout after one’s death. Where is the difference, then? Well, a will includes the instructions for all of your assets and you create the will on your own (with the valid notarial signature making it legally binding). On the contrary, a beneficiary designation form is required by the company holding the specific asset you will have in your possession, like a life insurance policy, retirement account, living trust, or financial account.

What is essential, a Beneficiary designation overrides the will. What does that mean in real life? Trustandwill.com provides us with a reasonable explanation:

‘Typically, a beneficiary designation overrides a Will. For example, let’s say that you wrote in your will that you want everything to be left to your spouse. You have a retirement savings account, for which you designated your two children as your beneficiaries. At the time of your passing, the retirement savings account designation would supersede anything written in your will. As a result, the money in the IRA would be transferred equally amongst your two children instead of your spouse.

When an individual passes away, the instructions in a Will will only distribute assets included in their probate estate. Assets with beneficiary designations get excluded from the estate by default. To avoid any conflict, it’s critical to make sure that the language of your will correlates with each of your beneficiary designations. It helps to perform a regular review and update your Will or beneficiary designation documents as needed.’

What is more, an executor cannot override the beneficiary. Even though he has the duty to fulfill the will instructions of the deceased, he still cannot change the recipients of the assets held by the company. People mentioned in the beneficiary designation form are not able to be modified by will.

Types of beneficiaries

Having the differences between the will and beneficiary designation, let’s dig into the types of beneficiaries that you can name.

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Primary Beneficiary

A primary beneficiary is someone or anything that is the first person in line to receive benefits from a will, trust, retirement account, life insurance policy, brokerage account, or annuity when the account or trust holder dies. A person can choose numerous primary beneficiaries and specify how distributions will be distributed. Beneficiaries named on insurance policies and accounts such as 401(k)s and Individual Retirement Accounts take a stand on behalf of those named in a will

This means that assets in these accounts will go to the policy’s chosen beneficiary, even if a will says otherwise. A spouse can be named as the primary beneficiary of an IRA, while the children can be named as the principal beneficiaries of the same person’s will. The IRA proceeds will be distributed to the spouse. The assets mentioned in the will be received by the adult children, who are chosen to be primary beneficiaries of the will. However, they cannot get anything from the IRA.

Contingent Beneficiary

A contingent beneficiary is a person, estate, or trust who inherits the assets of a deceased person if the principal beneficiary is unable to do so for any reason. Attorneys frequently advise their clients to include at least one contingent beneficiary in their wills. There can be multiple contingent beneficiaries, each of whom can be mentioned in a particular sequence.

When a person passes away, their assets are usually subject to probate. If primary and contingent beneficiaries are named, the probate process can be avoided, and assets can be passed quickly to heirs. The contingent beneficiary is one of the most critical aspects of the life insurance policy process, but it’s also one of the most misunderstood.

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The example (Source)

‘For example, Jillian passes away in a fatal car accident. Her daughter, Anne, is listed as her primary beneficiary on her life insurance policy. Usually, Jillian’s life insurance policy would pay out to Anne. However, Anne was also in the car and died shortly after Jillian. Jillian’s husband, Paul, is listed as a contingent beneficiary. Since the primary beneficiary is deceased, the payout will go to Paul.

A probate court may reach a similar determination in this situation, even without Paul listed as a contingent beneficiary. However, the process would take longer in that case, and the outcome would be far from certain.’

Co-beneficiary

Despite the fact that beneficiaries are divided into levels such as primary and contingent, each tier might have several beneficiaries identified. You can have numerous primary or contingent beneficiaries, for example. In the sense that they share the benefits, each of your primary beneficiaries is a co-beneficiary. When there are multiple primary beneficiaries, it’s typical to lay precisely what percentage of the benefits each one receives.

If this division is not selected, your major co-beneficiaries benefits may be shared evenly. You can add numerous contingent beneficiaries to your list. The same rules apply here as they did before. These contingent co-beneficiaries, in particular, will only receive a payment if none of the principal beneficiaries are able to accept it. The payout will be shared between the contingent beneficiaries in this situation.

The example (Source)

As an example, John has listed his three children as primary co-beneficiaries on his life insurance. He has also named his brothers, Eric and Rupert, as contingent beneficiaries. John specified an even split amongst his primary co-beneficiaries and did the same for his contingent ones. If John dies, and any of his children can receive the payout, then they will. The payout will be split evenly between the available children. However, if John’s children can’t receive the payout, then it will be split evenly between Eric and Rupert.’

The concepts of Primary Beneficiary or Co-beneficiary may be already known to you. That is why we would like to focus on the aspect of naming contingent beneficiaries and why they are essential for your life insurance proceeds.

Who can become a Contingent Beneficiary?

You can name almost anyone as a contingent beneficiary of your assets in a living trust, life insurance policy, or retirement account—with one exception: the recipient must have reached the age of majority under state law to receive the endowment directly. If the chosen beneficiary is under the age of 18 or 21, the assets will go to a legal guardian first, depending on your state. If a juvenile is named as a beneficiary, the matter may end up in probate court, which is something that life insurance and retirement funds are supposed to prevent.

Though it could have crossed your mind, remember that your pet cannot be a life insurance beneficiary or inherit any part of your estate. If you’re worried about your pet’s well-being after you pass away, you can provide for them in your last will or living trust by directing a specified sum of money to a trust that will be established for your pet after you pass away. You can also name someone to function as the trustee of the “pet trust” in your last will or trust, and that person will be in charge of spending the funds for the benefit of your pet for the rest of their life.

However, your beneficiary does not have to be a person. You can also identify a contingent beneficiary as your favorite charity or nonprofit organization – but that is a much complicated and complex procedure involving taxes.

To conclude, Anyone, even corporations, can be nominated as a contingent beneficiary. The sole requirements are that the beneficiary is alive and not the person who is being covered. You can’t name your deceased great grandparents as a beneficiary, and you can’t name yourself as a beneficiary. Besides that, a contingent beneficiary can be almost anybody or anything. Nonetheless, blood relatives are mentioned as beneficiaries more frequently than others, such as:

  • Spouses
  • Children
  • Siblings
  • Parents

There is also a possibility to choose a beneficiary not blood-related to you like:

  • Charities
  • Friends

Why is naming a Contingent Beneficiary essential for your insurance contract?

There are a few key reasons why naming a contingent beneficiary is crucial. Some life insurance plans and retirement funds require contingent beneficiaries to be listed, but the majority do not. Even in cases where it isn’t essential, it is frequently suggested. This is because it has no drawbacks while providing an additional layer of security. The policyholder’s affairs would be handled according to their wishes, ensuring that their assets are distributed to the person or people they desire.

It’s possible that your primary beneficiaries will live long enough to receive the rewards. Nonetheless, the idea of life insurance is to be prepared for the unexpected. By naming a contingent beneficiary, you can still have a voice in what happens to your money if your primary beneficiary passes away. Otherwise, it may become entangled in legal battles.

So, if we could list why naming a contingent beneficiary is so vital, we would include these aspects:

Wills take second place to beneficiaries.

Even if the will specifies that the assets in that account should go to someone else, if a beneficiary is assigned to a bank account, that beneficiary has rights to that account after the owner’s death. Retirement plans, annuities, and life insurance policies can all include contingent beneficiaries.

Allows you to donate to a specific organization or cause

It’s also a way for the policyholder’s estate to contribute to a special cause or charity after their death. Unexpected circumstances, such as the death of the primary beneficiary do not complicate asset disposition.

Avoid long probate process.

If the policyholder specifies the spouse as the sole beneficiary and there is no contingent beneficiary, the insurance proceeds may be subject to significant estate taxes. If the insured outlives their spouse by a few days, as is the case if they are both in a car accident, the proceeds will fall to the estate, which will result in massive unneeded taxes.

Make it simpler for your loved ones.

It may be difficult for your loved ones to obtain the funds you have left for them. The other issue is that your loved ones may have difficulty obtaining the funds themselves. Without naming a contingency, the corporation will have to figure out who the money should go to, which might cause a lot of complications and delays depending on your family circumstances.

The Infinite Banking Concept – Take care of your loved ones now!

As you may know already, the contingent beneficiary is a control and safety measure. It’s the most practical strategy to manage wealth distribution in the future. In addition, you should devote a significant amount of time to selecting who should be your beneficiary – it is not something to be done without thinking.

Connect the future financial safety of your beneficiaries with the possibility of fulfilling all of your pecuniary needs right now. Though it may seem impossible, we can ensure it is definitely within your reach. We would like to introduce you to the concept of Infinite Banking.

Infinite banking allows you to imitate how a traditional bank operates and borrows money, but without the need to depend on a third party. You will be both a creditor and a lender.

Instead of borrowing from a bank, you borrow money against yourself and single-handedly dictate cash flow while still allowing your whole life insurance policy to earn dividends (money) even though you are using that money elsewhere. In other words, you build wealth while borrowing and repaying the money held in the cash value of your permanent life insurance policy.

That being one of the most significant advantages of the whole life insurance policy, you will never have to deal with banking fees or interest rates on loans. As a policyholder, you can borrow money using your own policy’s cash value. Using this borrowing setup, you would never have to borrow money from a bank again and instead would borrow for yourself (your whole life insurance policy) and pay yourself back over time. Thus, being your bank.

The goal of Infinite banking is to duplicate the process as much as possible to build the value of your bank. The duplication process happens by lending and repayment of money typically held in the cash value of a permanent life insurance policy.

Infinite banking allows you to better work towards your individual and unique financial goals for yourself and your family. It has control over your finances without dealing with banking fees or interest rates on loans.

Infinite Banking involves:

  1. Overfunding (with after-tax funds) a high cash value whole life insurance policy from a life insurance company
  2. Accumulation of Cash Value(tax-free) throughout the years you are a policyholder of your Whole Life insurance policy
  3. Tax-Free Loans taken out against your whole life insurance policy’s cash value to use for your financial expenses.

By the process of borrowing for yourself, repaying, and so on – simply by being your bank, you earn the financial freedom and control of your money.

Implementing this banking strategy into your life gives you much better control over your finances and helps you build wealth using the life insurance policy.

Final thoughts

Naming a Contingent beneficiary is essential for the prospective insurance payout. Not doing so comes with many not-so-good side effects. By now, you should already see the importance of responsible beneficiary designation.