One of the ways in which the distinction between a primary and contingent beneficiary comes up is in the context of your life insurance policy. A primary beneficiary is the individual or group of individuals that you hope will receive the benefits of such a policy after you pass away. However, those people might no longer be around at the time that you pass away, which means that the life insurance company will then take those proceed and transfer them to the contingent beneficiary.
It’s a good idea to have a contingent beneficiary because you cannot predict the future. When you have named an alternative person to receive these benefits, you make it that much easier for the life insurance carrier to pass on the assets you intended to your beneficiaries. If you do not have a contingent beneficiary listed, this becomes a very complex situation for passing on your assets.
It can be a big mistake to ignore these designations for your beneficiary forms, especially if you are under the impression that your estate planning will document manages the proceeds from life insurance policies, brokerage accounts, and 401K accounts. The beneficiary designation form is provided to you by these companies are important for your review and completion. These beneficiary designation forms override any information listed in your other estate planning documents.
A common challenge that emerges in the context of beneficiary designation forms has to do with failing to update your beneficiaries after you get a divorce. It is highly likely that if married, you named your spouse as the recipient of your assets from a life insurance policy.
Failing to update this information could enable a former spouse to receive a significant windfall if you pass away, and very few divorce people intend for this to happen. Make sure that you review your beneficiary designation forms on an annual basis to ensure that both the primary and contingent beneficiaries are accurate.