Most people who have a life insurance policy understand the role of a beneficiary – that person receives the death benefit if a life insurance policy is in place when the policyholder passes away. Policies typically also allow you to name contingent beneficiaries. Contingent beneficiaries receive the insurance payout if the primary beneficiary has either passed away before they could receive the funds or has refused the payout for any reason. Designating a contingent beneficiary does not reduce the primary beneficiary’s payout or affect it in any way.

While it’s not essential to name a contingent beneficiary, there are many good reasons to do so. Here are three reasons to name a contingent beneficiary for a whole life insurance policy or other life insurance policy:

It can make the transfer of funds smoother 

Not many people think about what would happen if their beneficiary passed on before they did. This may be a difficult thought to entertain but it’s worth considering the outcome – the life insurance payout may have to go through probate court which can take months or years. There’s also no guarantee that the final distribution of the funds will align with the policyholder’s intent. Naming a contingent beneficiary means that the policyholder can decide beforehand who receives the funds if the primary beneficiary passes on unexpectedly.

The primary beneficiary is elderly 

Some policyholders may get permanent life insurance, such as whole life insurance, and choose to designate dependent parents (or other older relatives) as beneficiaries. This could be because the person is supporting their relative. In such a case there is a chance that the older beneficiaries may pass on before the policyholder does. In this case, it makes sense to name a contingent beneficiary to receive the funds instead. The contingent beneficiary can be another relative or even a charity of the policy owner’s choosing.

There’s no downside to designating a contingent beneficiary 

Adding a contingent beneficiary doesn’t change anything for the primary beneficiary. If the primary beneficiary is alive and willing to accept the payout, then the contingent beneficiary receives no part of the death benefit. It’s a best practice to have both primary and contingent beneficiaries to ensure a smooth process. So even though some situations may warrant naming a contingent beneficiary more than others, it’s worth naming one just to be on the safe side.

Source: Northwestern Mutual

Contact: Don Klein, 1-800-323-7033