Contingent and primary beneficiaries differ in their roles and hierarchy. A primary beneficiary receives the assets or life insurance death benefits first. According to Penny Gusner’s article “Naming A Life Insurance Beneficiary: What To Know” on Forbes, a contingent beneficiary can claim benefits if the ideal beneficiaries are dead.

What is a Primary Beneficiary?

A primary beneficiary is a person who has the first claim to the policy benefit when a life insurance plan holder dies. It is the first person or legal entity to receive these benefits.

From our experts at IBC Financial, the ideal beneficiaries can be.

• A person, e.g. a spouse, child, or parent
• An entity, e.g. a charity or non-profit organization
• Trusts
• Your estate

How do their roles differ?

A contingent and primary beneficiary’s roles differ in priority and purpose. Here are some key differences in their duties:

Priority: A basic beneficiary has the first claim to the life insurance benefits.
Purpose: Secondary beneficiaries serve as a backup plan. They ensure retirement assets are according to the account holder’s plan.

Choosing a contingent beneficiary depends on some factors. Choosing a contingent beneficiary requires that you consider your financial responsibilities. According to Ashlyn Brooks’ article “What are contingent beneficiaries?” on Bankrate, a secondary recipient can handle your financial obligations.

From our study at IBC Financial, here are other factor to consider when choosing an alternative beneficiary.

• Dependents: First, you have to determine who will need financial support when you pass away and decide who can adequately care for them.
• Minor Children:  If you want to name a minor, you must create a trust or legal entity to manage the fund till their adulthood.
• Organizations: You can name your favorite charity as your contingent beneficiary.

Yes, you can name a minor as a contingent beneficiary. To name a minor is, however, not straightforward. According to Keith Masterman’s article “When naming minor beneficiaries causes major complications ” of Advisor, minors are not entitled to receive money directly. Naming a minor can lead to some complications. Here are the two main problems.

• Court involvement. When you pass away, the court will instruct a court-appointed guardian to manage the assets. This process is costly and time-consuming. To prevent this, you must name a trustee to manage the benefits till the minor reaches the age of majority.
• Lack of financial maturity. Inheriting wealth at the young age of maturity may be problematic. Most young people lack the knowledge to handle such wealth. 

Naming a contingent beneficiary is vital. Naming a contingent beneficiary helps to avoid unplanned probate expenses. According to Tim Vipond’s article “Contingent Beneficiary” on CFI, it serves as a backup plan. It also prevents delays and reductions in the beneficiary life insurance payout. The event of a deceased beneficiary brings the backup plan into play. The contingent beneficiary ensures that the estate goals of the owner are respected. Naming a secondary beneficiary prevents delays in distribution and prevents family disputes. It also prevents reductions in the beneficiary life insurance payout, as a probate will not be necessary.

The lack of a contingent beneficiary is associated with many financial risks. From our research at IBC Financial, here are five risks of not naming a secondary beneficiary.

• Delay in asset distribution. This may affect the deceased financial obligations, such as debts, mortgages, etc.
• Increased taxes. Assets without a recipient may be subject to taxes.
• Probate costs. The estate may incur expenses in legal process, which will reduce the value of the assets
• Exposure to creditors. Assets available to your estate can be claimed by creditors.
• Improper distribution. Benefits may be shared with unintended individuals.

Reviewing beneficiary designations starts by identifying all your investment accounts. Reviewing beneficiary designations ensures your wealth goes to the right persons after you pass away. According to Troy Werner’s article “Does Beneficiary Designation Override a Will?” of The Werner Law Firm, a beneficiary can override a will. Hence, it is important to review your designations regularly.

Here are five steps to reviewing your designations.

• Identify your account. Gather information on all your financial accounts with a designator. These may include a life insurance policy, individual retirement accounts, and bank accounts with payable-on-death or transferable-on-death designations.
• Request current beneficiary designations. Obtain the information on designators for each account. Check their current contact information and note name changes.
• Review allocations. Adjust assigned assets to ensure the right portion gets to who you wish. Assign a secondary beneficiary as a backup plan.
• Report revision. Submit and obtain a written acknowledgement of your changes to your account managers and life insurance company.
• File the acknowledgement. Update your beneficiaries on the changes you made with clear instructions on what to do when you pass away.

Our experts at IBC Financial recommend you review your beneficiaries at least once a year. This reflects major life events, like marriage, childbirth, divorce, or deceased beneficiary.

How to update beneficiary information is determined by your insurance company. Updating beneficiary information can be done online or through paperwork. According to an article titled “The Importance of Updating Your Personal and Beneficiary Information” by UBC, it involves filling some forms.

From our research at IBC Financial, here are four steps on how to update your beneficiary information. Most insurance companies allow you to change beneficiary information through your portal. If yours does not, you can obtain the necessary forms.

• Find the beneficiary section and view and update the beneficiary information.
• Modify beneficiaries. You can add or remove designators. You can also update their information.
• Confirm and submit. Review your changes and ensure they are correct.

Contingent beneficiary designations are affected by some mistakes. Contingent beneficiary designations are affected by failure to name one. According to Amanda Maurer’s article “4 Common Mistakes Made On Life Insurance Beneficiary Designations” on LinkedIn, this can lead to probate and potential estate taxes.

From our research at IBC Financial, here are five common mistakes that can affect contingent beneficiary designations.

• Failure to name an alternate beneficiary
• Not updating your designations
• Naming beneficiaries that do not align with your estate planning goals.
• Naming a child beneficiary without stipulating a custodian

Failure to review your designations from time to time.

Contingent beneficiaries are affected by some legal problems. Contingent beneficiaries are influenced by court proceedings. According to Kevin Wark’s article “The Sanctity of Insurance Designations” on Advocis, designations may be challenged if they are made to defraud creditors.

From your experts at IBC Financial, here are four legal complications that can affect a contingent beneficiary.

Presumption of resulting trust. A court can overturn designations if they are made in trust. If challenged, a contingent beneficiary must prove that the benefits were made as a gift and not in trust for the estate.

1. Creditors protection. If a protection beneficiary is named with the intent of defrauding creditors, the courts can make the asset available to creditors.
2. Joint liability. The beneficiary may be jointly liable to taxes owned by the deceased person on some registered retirement accounts like the RRSPs.
3. Constructive Trust. If a person makes contributions to a life insurance policy with the expectation of being the beneficiary, the court will ensure the person receives the life insurance proceeds.

Tax laws can impact beneficiary choices in the following ways:

• Tax benefits. Naming a spouse as a beneficiary for registered retirement plans allows for tax-deferred asset transfers. Non-spouse beneficiaries face tighter rules. Many are only allowed to withdraw after 10 years of inheritance. This leads to higher taxable income in a short period
• Tax liability. Ineligible beneficiaries may pay taxes on the deceased final tax return.
• TFSA transfers. Growth of proceeds after death may be taxable.
• Account type. Some distributions from certain accounts are taxed as income, e.g., US inherits pretax 401(k). Qualified distributions from a US Roth account are tax-free.

Provisional laws affect beneficiary choices in the following ways:

• Family Law Legislation: In some provinces, spouses are allowed to challenge a beneficiary designation.
• Dependent Relief Legislation: A dependent may make a claim to the payouts if no provision was made for the dependent’s support.
• Minor beneficiaries: most provinces require the appointment of a trustee before designating minors.
• Probate process fees: This varies across provinces, influencing potential savings.

Advisors secure your legacy by providing expert opinions. Advisors secure your legacy by ensuring that your estate plan is executed according to your goals. According to Neel Shah’s article “What Role Can a Financial Advisor Play in Your Estate Planning Process?” , they provide the best strategies.

Here are some roles financial professionals play in securing your legacy.

• Helps you name a contingent beneficiary
• Ensures you review and update your designations regularly
• Helps you avoid probate
• Assists you in tailoring your estate plan by clearly naming contingent beneficiaries.

For more information on contingent beneficiaries, contact us at IBC Financial.