How to choose a Beneficiary? Primary vs Contingent Allocation Rules.

Life insurance is purchased for many reasons. But there is typically one element that is similar in all life insurance purchases – the future financial security of the life insurance beneficiary. That’s why it is important to know how to choose beneficiaries for life insurance, both primary vs contingent.

What is a Beneficiary?

A life insurance beneficiary is an individual or the entity (such as a trust or a charity) that you have named in your policy to receive the death benefit proceeds. Deciding who receives your proceeds, as well as how much each will receive, is one of the most important decisions in the life insurance buying process.

Some of the most common types of beneficiaries may include:

  • Individuals
  • Charitable Organizations
  • Trusts
  • Businesses

What is the Difference Between a Primary and a Contingent Beneficiary?

There are different types of beneficiary designations that you can make on your life insurance coverage. These include primary and contingent. The primary beneficiary (or beneficiaries, if you have more than one) stands to receive the proceeds first.

If, however, your primary beneficiary passes away while the policy is still in force, the contingent beneficiary (or beneficiaries) are essentially the next in line to receive the death benefit proceeds.

There is even a third type. This is known as a tertiary beneficiary. The tertiary is essentially the “back up” if both your primary and contingent beneficiaries should pass away before you do.

Because the unexpected can, and often does, occur, it is important that you name a primary and contingent beneficiary on your life insurance coverage. Also, because your life changes over time, it is recommended that you regularly review the beneficiary(ies) and make any revisions if necessary.

Naming a Minor as a Beneficiary

Most people will have to decide if they should leave their spouse or child as the primary beneficiary. If you have young children, it is likely that you need life insurance. However, if your children (or other named beneficiaries) are still minors (which, depending on your state, is age 18 or 21), the life insurance company will not pay out the policy proceeds directly to them.

In this case, you should also designate a guardian for your child (or children) who can administer the funds. Otherwise, it is possible that if there is no guardian, the probate court will choose one at the time of your passing…and it won’t likely be an individual that you would have picked. Another option is for you to arrange for the life insurance proceeds to go into a trust until your child (or children) becomes an adult.

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