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Retirement

What Is a Contingent Beneficiary?

John’s your everyday man. He has the house, the wife and kids, the reliable car—a typical middle-class life. He’s put together his will for who gets what. And in case something happens to him, he has life insurance so his family will be taken care of. His wife is the primary beneficiary to receive the life insurance money. But there’s one thing John’s missing . . .

What if John and his wife die at the same time? Who gets the life insurance money then? Who provides for the kids? Or if his wife dies before he does, what happens to the policy then?

In comes the contingent beneficiary.

John needs to list a second person—aka a contingent beneficiary—to receive the life insurance money in case something happens to his primary beneficiary. And you need to do the same as John. But don’t worry, it isn’t as complicated as it sounds. Here are a few things you should know . . .

  1. What Is the Meaning of Contingent?
  2. What Is a Contingent Beneficiary?
  3. What Role Does a Contingent Beneficiary Play After Someone Dies?
  4. What Is the Main Benefit of Naming a Contingent Beneficiary?
  5. What if You Don’t Name a Contingent Beneficiary?

1. What Is the Meaning of Contingent?

Contingent just means a backup plan. For example, suppose you’re working at Company A and investing 15% of your income so you can retire comfortably someday. Unfortunately, life happens—you get laid off from your job and you need to pause your retirement savings plan.

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Your contingent plan is to call in a favor from a friend who’s an executive at another company in the same industry to help you get a new job. Your friend comes through, and you get a new job at Company B. Once you’re settled at your new job, you resume investing 15% of your income for retirement. This means your contingent plan worked.

Tip: Always have a contingent (backup) plan so you’re covered in case your original plan doesn’t work out.

2. What Is a Contingent Beneficiary?

Here’s another straightforward definition: a contingent beneficiary (aka a secondary beneficiary) is basically just your backup beneficiary—the person you choose to get your stuff if your primary beneficiary (your first choice) isn’t available when you pass away. You can (and should) name both a primary and a contingent beneficiary in all of your estate planning documents.

A contingent beneficiary can be a person (or people), organizations, estates, charities or trusts. Minor children and pets don’t qualify (sorry, Fido) because they aren’t legally able to accept assigned assets.

Most people name a close friend and/or an immediate family member as their contingent beneficiary. You can name multiple beneficiaries, so long as their share of your assets adds up to 100%.

You can also change your contingent beneficiary. Life happens, and sometimes you simply decide to shift who gets what. When that happens, you can change your contingent beneficiary no prob.

Let’s apply the same example from the previous section to contingent beneficiaries. Suppose you’ve been working at Company B for years. You’ve been investing 15% of your income and your nest egg has grown quite large.

In your will, you name your spouse of 29 years as your primary beneficiary, and your brother as your contingent beneficiary. In this case, if your spouse passes away before you do, your brother will receive the proceeds from your retirement accounts when you pass away.

Now let’s dig deeper into the role and responsibilities of a contingent beneficiary.

3. What Role Does a Contingent Beneficiary Play After Someone Dies?

Remember—a contingent beneficiary is who you pick to inherit your stuff if your primary beneficiary isn’t around when you pass away. Hold that thought while we look at some different combinations of the contingent beneficiary’s role.

Primary Beneficiary Is Available

In this first scenario, a primary beneficiary is named and is available—they’ll receive all assets spelled out by the decedent (the dearly departed) in their estate planning documents. The contingent beneficiary does not play a role here since the primary beneficiary was able to accept the assets.

Primary Beneficiary Is Not Available

Now let’s switch things around and pretend the primary beneficiary doesn’t get their inheritance. There’s more than one reason why this might happen:

  • Death – the primary beneficiary passes away before the decedent
  • Denial – the primary beneficiary doesn’t want the inheritance (it happens!)
  • Missing – the primary beneficiary can’t be located

Since the primary beneficiary isn’t available in any of these cases, if the decedent thought ahead and identified a contingent beneficiary, the contingent beneficiary is the rightful recipient of all assets.

Worst case? The decedent didn’t name a primary or a contingent beneficiary. In this case, all assets remain in the decedent’s estate where they’re subject to estate taxes and a lengthy probate process. All probate taxes and fees come out of the decedent’s estate. Boo!

Here’s a table that shows what happens in each scenario:

Scenario

Result

  • Primary beneficiary is named and is available.
  • Contingent beneficiary is also named.

Assets go to primary beneficiary.

  • Primary beneficiary is named and is available.
  • Contingent beneficiary is not named.

Assets go to primary beneficiary.

  • Primary beneficiary is named, is available, but doesn’t want the assets.
  • Contingent beneficiary is named and is available.

Assets go to contingent beneficiary.

  • Primary beneficiary is named but is not available.
  • Contingent beneficiary is named and is available.

Assets go to contingent beneficiary.

  • Primary beneficiary is not named.
  • Contingent beneficiary is not named.

Assets remain in decedent’s estate and go through a long probate process.

Depending on the result of each scenario above, either the primary or the contingent beneficiary is responsible for reporting the death and filing necessary forms.

4. What Is the Main Benefit of Naming a Contingent Beneficiary?

The main benefit of naming a contingent beneficiary can be summed up in one word: family. You’ll be helping your family avoid the unnecessary time and expense of dealing with probate red tape after you pass away.

For example, let’s meet Joyce. Suppose she lists her grown children’s stepfather, Jack, as the primary beneficiary of her assets. She also lists her favorite charity as her contingent beneficiary.

Many years later after a long and happy life, Jack and Joyce die just days apart. Joyce’s assets then go directly to her contingent beneficiary: her favorite charity. In this case, Joyce’s kids don’t have to deal with a long, stressful probate process. Because she planned ahead, her children can focus on grieving and healing.

5. What if You Don’t Name a Contingent Beneficiary?

Here’s what would happen if Joyce didn’t name a contingent beneficiary.

If Jack and Joyce died at the same time and Joyce didn’t name a contingent beneficiary, her adult kids are in for a long and expensive process with probate court and state law. Luckily for Joyce’s kids, the order of succession is usually the surviving spouse or domestic partner, followed by the children, parents, siblings, and extended family members.

So in this case, Joyce’s children would be next in line to receive her assets anyway—but not before dealing with probate red tape to prove their rightful ownership.

And if Jack came into the marriage with his own children? Joyce’s kids are in for an even longer, messier, and more expensive probate process. Yikes!

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Always Have a Backup Plan

What’s the solution? Always, always, always name a contingent beneficiary. By doing that, you keep it clear what happens to your assets when you pass away, and your primary beneficiary is unavailable.

Naming a contingent beneficiary might sound like a huge pain—but it’s not! You don’t even need to go to a lawyer’s office or spend a fortune. You can create your own will online with RamseyTrusted provider Mama Bear Legal Forms in less than 20 minutes. All you do is plug in your information, including your beneficiaries, and the rest is done for you.

Get started making your will now!

Ramsey Solutions

About the author

Ramsey Solutions

Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books (including 12 national bestsellers) published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners. Learn More.

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