What Is a Contingent Beneficiary?

Understanding the Definition of Contingent Beneficiary

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A contingent beneficiary is the alternative choice to receive the proceeds of a beneficiary-named financial account if the primary beneficiary is not alive to accept the benefits of the account at the time they are paid.

Essentially, a contingent beneficiary is second in line after the primary beneficiary or beneficiaries to inherit assets from accounts such as 401(k)s, individual retirement accounts, life insurance and annuity policies and trust accounts.

Because these accounts include named beneficiaries, they are not gifted or inherited through a will. The names on the accounts serve as instructions that override any other will or instructional document you create. Because these types of accounts pass on to others through beneficiary designations they are sometimes referred to as will substitutes. 

The owner of the financial account selects primary and contingent beneficiaries upon opening the account, insurance policy or trust. With a 401(k) or IRA, changing a beneficiary is as easy as calling your plan administrator or broker and completing some simple paperwork. In many cases, beneficiary information for 401(k)s and IRAs may be updated online. If the life insurance policy or trust is revocable, the named beneficiaries can be changed by the account holder at any time.

It is important to keep beneficiaries up to date. The important beneficiaries in your life can change as you get older, marry, start a family, divorce or experience a death or some other major life change.

The beneficiaries you would choose for your first 401(k) in your early 20s may not be the same beneficiaries you would choose in your 40s, for example. Remind yourself to check beneficiaries regularly, or review them after major life changes.

There is another type of contingent beneficiary. With certain trusts structured with built-in incentives, a beneficiary may have to meet a certain contingency before assets are paid.

For example, a child must complete college or turn age 25 before becoming a beneficiary of trust assets.

Do Contingent Beneficiaries Have to Be People?

Contingent beneficiaries do not necessarily have to be individuals. They can be organizations, charities, or even trusts.

How Does a Contingent Beneficiary Differ From a Primary Beneficiary?

Contingent beneficiary designations differ from primary beneficiaries. A primary beneficiary receives your account balance in the unfortunate circumstance that you die. By definition, a contingent beneficiary is the person or thing that receives the benefits of your account if the primary beneficiary can not. That is why you should think of contingent beneficiaries as a back-up plan. When you invest in a beneficiary-named financial account, such as an Individual Retirement Account401(k)insurance policy529 college savings planhealth savings account, or trust, you name the person or people you want to receive the assets in the account or take ownership should you pass away. These are primary beneficiaries. Contingent beneficiaries come in if the primary is not alive to collect the assets.

Updating beneficiary designations whenever there is a change in status due to either the death of a beneficiary or the addition of a new family member is an important estate planning step.

Speaking of estate planning, everyone needs to have one regardless of income or net worth.  You can learn more about the estate planning process here (See The One Thing Most Retirement Plans are Missing). 

You can name more than one primary or contingent beneficiary. You allocate percentages for each beneficiary, specifying which percentage of the account they should receive or inherit.

For more information on contingent beneficiaries, check out Contingent Beneficiary and Primary Beneficiary Difference.

Updated by Scott Spann

Also Known As: secondary beneficiary, alternate beneficiary