Understanding the Legalities of the Primary Beneficiary Vs Contingent Beneficiary

Designating a beneficiary of a life insurance policy or last will and testament may be one of the most important decisions an individual will ever make. Care needs to be taken, as there is any number of combinations of beneficiary choices available depending on how an individual chooses to divide the assets of his or her estate.

What is a Primary Beneficiary?

A primary beneficiary is the person or group of people an individual chooses to bequeath his or her assets. If the main beneficiary is in fact more than one person, then assets are usually divided into designated percentages. If however, the deceased individual left his or her assets and estate to multiple individuals and percentages had not been specifically designated, then assets would be divided equally between each of the named beneficiaries. In most instances however, an individual usually names his or her spouse or partner as primary beneficiary.

What is a Contingent Beneficiary?

A contingent beneficiary is chosen as the next person in line set to inherit the proceeds of an individualís estate if the primary beneficiary is unable for whatever reason. In most cases, this person provides a viable legal option for inheritance by ensuring that the deceased assets and estate pass to the loved one of his or her own choosing. In addition, without the presence of a secondary beneficiary in a legally binding document such as a will or insurance policy, the deceased assets would fall into the hands of the state rather than a family member or close friend.

Legalities of Primary versus Contingent Beneficiaries

Cases in which the main beneficiary dies simultaneously with the policyholder, usually require that all financial assets and the estate in its entirety revert directly into the hands of the secondary beneficiary. For example, if a husband and wife both died in a car crash and the wife was the main beneficiary, the assets of the estate would go directly to the secondary beneficiary. Often, such as in this example, the secondary beneficiaries are most often one or more of the coupleís children.

Other Exceptions Concerning Beneficiaries

In addition to existing legalities, most states stipulate that if the main designated beneficiary dies less than 30 days after the policyholder, then all of the deceased assets and estate go directly to the secondary beneficiary of the previously deceased policyholder. After the initial 30-day period, however, the inherited assets become the legal property of the main beneficiary to do with as he or she wishes.

State Limitations of Beneficiary Choices

When naming beneficiaries, it is important to first check for any legal stipulations that might limit beneficiary choices. Some states and IRA retirement accounts require that a spouse be named as the main beneficiary. The only way an individual can get around this restriction is to procure a written waiver from the spouse allowing the policyholder to name someone else as alternate beneficiary. Furthermore, if an individual lives in a state with community property laws, the spouse may still be considered the legal beneficiary even in the event that an individual has named someone else.

Primary and contingent beneficiaries act as an assurance that an individualís assets and estate will pass along to the people of his or her choosing. Beneficiary choices fulfill these legal roles provide peace of mind to the policy holder that loved ones will be taken care of in the event of their death.