When it comes to estate planning, one of the most important decisions you'll make is who your primary beneficiary will be. But what happens if your primary beneficiary dies before you do? That's where contingent beneficiaries come in.
In this article, we'll compare Primary Beneficiary Vs Contingent Beneficiary and help you decide which option is right for you.
Primary Beneficiary Vs Contingent Beneficiary Table of Contents
What is a Primary Beneficiary?
A primary beneficiary is the first person named in a will or insurance policy who stands to inherit the assets. In the event that the primary beneficiary dies before the person making the will or taking out the policy, their assets will go to the secondary beneficiary.
What is a Contingent Beneficiary?
A contingent beneficiary is someone who only receives the death benefit if the primary beneficiary dies before the policyholder. If both the primary and contingent beneficiaries are alive when the policyholder dies, then the contingent beneficiary doesn’t receive anything.
What is The Difference Between a Primary Beneficiary and a Contingent Beneficiary?
The main difference between a primary beneficiary and a contingent beneficiary is that a primary beneficiary will receive the money from the policy regardless of what happens, while a contingent beneficiary will only receive the money if the primary beneficiary dies.
There are advantages and disadvantages to both options, so it's important to understand both before making a decision.
If you're the primary beneficiary, you can be sure that you'll receive the money from the policy. However, if something happens and you die before the policyholder, the money will go to the contingent beneficiary.
If you're the contingent beneficiary, you may not receive the money from the policy unless the primary beneficiary dies first. However, if the primary beneficiary dies, you'll be first in line to receive the money.
What Are The Different Types of Primary Beneficiary?
When it comes to designating a primary beneficiary, there are generally two different types of beneficiaries:
- Natural Beneficiary
- Contingent Beneficiary
The natural beneficiary is typically a spouse or child, while the contingent beneficiary is usually someone else like a close friend or family member.
What Are The Different Types of Contingent Beneficiary?
There are two different types of contingent beneficiary:
A primary contingent beneficiary is someone who will receive the assets if the named beneficiaries die before the account holder.
A secondary contingent beneficiary is someone who will only receive the assets if both the primary and named beneficiaries die before the account holder.
What Are The Advantages of a Primary Beneficiary?
There are several advantages of having a primary beneficiary. The first is that if something happens to you, the primary beneficiary will be the first in line to receive your assets. This can be important if you have young children or other family members who depend on you financially.
Additionally, if you have a large estate, naming a primary beneficiary can help to ensure that your assets are distributed according to your wishes.
Another advantage of having a primary beneficiary is that it can help to avoid probate. Probate is the legal process through which a person's estate is settled after their death. If you have a primary beneficiary, your assets will go directly to them, without going through probate. This can save your family time and money, as probate can be a lengthy and expensive process.
Finally, naming a primary beneficiary can give you peace of mind. Knowing that your assets will go directly to the person or people you care about most can provide some comfort during difficult times.
What Are The Advantages of a Contingent Beneficiary?
There are several advantages to having a contingent beneficiary. One of the biggest advantages is that if something happens to the primary beneficiary, the contingent beneficiary will receive the benefits. This can provide peace of mind for both the primary and contingent beneficiaries.
Another advantage of having a contingent beneficiary is that it can help to avoid probate. Probate is the legal process of distributing a person's assets after they die. If there is no contingent beneficiary, the assets will have to go through probate. This can be a lengthy and expensive process.
Finally, having a contingent beneficiary can help to ensure that the assets are distributed according to your wishes. If you do not have a contingent beneficiary, your assets could be distributed according to the laws of your state. This could mean that your assets are not distributed the way you wanted them to be.
What Are The Disadvantages of Primary Beneficiary?
There are a few potential disadvantages to consider when making someone your primary beneficiary.
For example, if the primary beneficiary dies before you, then their share of your assets will go to whoever you've named as your contingent beneficiary. This could create conflict within your family if there are people who feel they should have been named the primary beneficiary.
Another potential disadvantage is that the primary beneficiary could end up with a large amount of money all at once, which could be difficult for them to manage. This is especially true if they are young and don't have much experience handling money.
Finally, if you name your spouse as your primary beneficiary, then divorce could complicate things. If you get divorced after naming your spouse as your primary beneficiary, then you will need to change your beneficiaries. Otherwise, your ex-spouse could end up with your assets instead of the person you want to have them.
What Are The Disadvantages of Contingent Beneficiary?
When it comes to contingent beneficiary, there are a few disadvantages worth mentioning.
First and foremost, if the primary beneficiary dies before the account holder, the assets will be distributed according to state intestacy laws. This means that the distribution of assets may not end up going to who the account holder intended.
Another disadvantage is that contingent beneficiaries may have a harder time accessing the assets. In some cases, the account holder may need to give their permission for the beneficiary to access the funds. This can be an issue if the account holder becomes incapacitated and is unable to give their permission.
Lastly, contingent beneficiaries may not be notified of their status as such until after the account holder's death. This can cause problems if the beneficiary is not prepared to deal with the assets. It's important to make sure that your contingent beneficiary is aware of their status and knows what to do in the event of your death.
So, Which One Should You Use?
The answer to that question depends on your unique circumstances. If you're single with no children, then a contingent beneficiary probably makes the most sense. But if you're married with young children, then a primary beneficiary is probably the better option.
There are advantages and disadvantages to both options, so it's important that you understand both before making a decision.
What Are Some Alternatives to Using a Primary Beneficiary or a Contingent Beneficiary?
One option is to create a trust. This can be an effective way to manage your assets and ensure that they are distributed according to your wishes.
Another option is to use a life insurance policy as your primary beneficiary. This can provide some financial security for your loved ones in the event of your death.
There are also a number of other options that you may want to consider, such as naming a guardian for your children or setting up a power of attorney. Ultimately, the best option for you will depend on your personal circumstances and wishes.
What Are Some Tips For Using a Primary Beneficiary?
There are a few key things to keep in mind when using a primary beneficiary:
Make sure that the primary beneficiary is somebody you trust completely. This person will be in charge of your finances if something happens to you, so it’s important to choose somebody who is responsible and level-headed.
If you have more than one primary beneficiary, make sure that they are aware of the other person’s existence and contact information. It’s important to have a backup plan in place in case something happens to one of the beneficiaries.
Keep your beneficiary designation up to date. If you get married, divorced, or have children, be sure to update your beneficiary information accordingly.
Communicate with your primary beneficiary about your wishes. It’s important to have a discussion about what you would like to happen with your finances in the event of your death, so that there are no surprises down the road.
What Are Some Tips For Using a Contingent Beneficiary?
There are a few key things to keep in mind when using a contingent beneficiary. First, you should keep your contingent beneficiary up to date. If you have any changes in your life, such as getting married or having children, be sure to update your beneficiary designation.
Second, you should name more than one contingent beneficiary. This way, if something happens to your first choice, there is someone else in line to receive your assets.
Third, you should review your beneficiary designations periodically. Things change, and you want to make sure that your beneficiaries are still the people you want them to be.
Finally, remember that a contingent beneficiary only comes into play if the primary beneficiary dies before you do. If you and the primary beneficiary die at the same time, the assets will go to the contingent beneficiary.