Estate Planning

Primary Beneficiary vs. Contingent Beneficiary in Arizona: What’s the Difference?

Primary Beneficiary vs. Contingent Beneficiary in Arizona- What's the Difference?

Difference between primary and contingent beneficiaries

Are you confused on the difference between a primary beneficiary and a contingent beneficiary in AZ? Here's everything you need to know.

Around 40 percent of Americans will leave one or more loved ones financially burdened when they die. You shouldn't want to be one of these Americans. You can avoid becoming this way by purchasing life insurance as part of your estate planning.

But what happens if the original or primary beneficiary of your life insurance dies before you do? It can happen. This is why you need to assign a primary and contingent beneficiaries. It is always good to know primary versus contingent beneficiary to know who to choose.

Read more to learn about these types of beneficiaries, primary and contingent beneficiaries.

What Is Life Insurance? 

A person will usually buy a life insurance policy to protect their loved ones. Their loved ones can experience severe distress after their death. A life insurance policy will prevent this from occurring. An estate planning attorney can also help you size that life insurance proceeds in a way that the death benefit cover estate expenses like legal costs and taxes.

A life insurance policy is a deal between a policyholder and a life insurance company. Once a policyholder signs a contract, they pay a monthly or annual premium for as long as the life insurance term lasts.

If the policyholder dies while the policy is active, the life insurance company will pay a designated amount to the policyholder's beneficiary or to a living trust .

What Is a Beneficiary? Whats a Contingent Beneficiary? 

Beneficiaries are the people that will receive the life insurance policy's payout. Policyholders should designate at least one when they create their original life insurance policy. Upon the death of the policyholder, beneficiaries should file a claim with the insurance company responsible for the policy. Contingency beneficiary comes after the primary beneficiary. Understanding the difference between beneficiary designation primary vs contingent is very important. Also knowing what to do if beneficiary dies before insured is crucial as well.

You can have primary beneficiaries (with a percentage assigned to it) and also secondary and other contingent beneficiary designations. Beneficiary planners are important. Schedule an appointment today to know the difference between a contingent beneficiary and a primary beneficiary. You may want to understand also secondary beneficiary rights. Having an extra contingent beneficary will nor hurt.

Claiming a Payout 

To claim a life insurance policy payout, beneficiaries need the following pieces of information:

  • A certified death certificate
  • Policy information
  • Filled out claim forms
  • Contact information

Insurers should then approve or disapprove the payout claim. An experienced estate planning attorney will guide you in how to claim if needed.

Types of Payout 

If the claim is approved, the beneficiaries can receive the policy's payout in several ways. These include the following:

  • Lifetime annuity
  • Lump sum payment
  • Fixed period annuity
  • Retained asset account
  • Specific income annuity

The beneficiaries should receive their payout 30 to 60 days after they submit all the necessary forms. If a primary beneficiary passes away the payment will go to the other contingent beneficiary.

Rejected Claims 

Unfortunately, insurers can reject claims for life insurance payouts temporarily or permanently for several reasons. Some of the reasons why they may reject a payout claim include the following:

  • Missing information from the claim
  • Death occurs within two years of the policy's start
  • The cause of death was suicide
  • The cause of death was a highly dangerous activity
  • Any false information

Contingent vs. Primary Beneficiary (and Secondary beneficiary)

Primary beneficiaries are the first people in line to receive a policy payout. Contingent beneficiaries are the second (or higher) people in line to receive a policy payout. There may be multiple Primary beneficiaries need to die before contingent beneficiaries can receive payment.

One or Multiple Beneficiaries 

One or several people or organizations can serve as your primary beneficiaries. The same applies to your contingent beneficiaries. You can designate as many primary or contingent beneficiaries as you wish. Designating your estate beneficiaries may be a good idea as well, specially if you have a blended family and you want to take specific care of the surviving spouse.

A qualified estate planning professional should be able to guide you to make sure you do it correctly. Sometimes having multiple life insurance policies will make more sense so you can take care of your extended family members as well if needed. Have a death benefits as part of your estate plan makes sense as well, specially if you have minor children and their to be legal guardian may need the money to help them.

Who Should Be Beneficiaries 

People usually choose close relatives to be their primary beneficiaries. Their spouses and/or dependents are common examples. How does contingent beneficiary work? Contingent beneficiaries are usually more distant relatives. You may want to use the same beneficiaries you have in your estate plan.

You can choose almost anyone you want to be your designated beneficiary. You can also choose organizations to be your beneficiaries. But there are some types of people that you can't and/or shouldn't name as beneficiaries.

Consider choosing beneficiaries for your retirement accounts as well. Naming beneficiaries should be done to all your accounts to keep your estate out of probate court.

On Minors

An insurer may be unable to give minor children a policy payout until they come of age. You may need to select a custodian who will manage the funds until that day or consider creating a trust in your estate planning for the minor. Before you name a child beneficiary, discuss the matter with a lawyer or financial advisor.

On Pets

Unfortunately, pets cannot be beneficiaries. You can ensure the welfare of your pet after you pass on. But you can't do this with a life insurance policy. If you want your pets to be taken care of after you pass, look into creating an Arizona pet trust.

When you're doing your estate planning, leave a clause in your last will or living trust about your pet. In it, you can leave a specific sum of money for a pet trust. You can leave this money to a trustee who should use the funds to take care of your pet throughout its lifetime.

Updating Beneficiaries 

In many cases, a primary beneficiary predeceases you. In other cases, new people will come and go from your life. If such events occur, you may want to update your list of beneficiaries.

Consider checking your list of beneficiaries regularly and updating the list when necessary. If you add new beneficiaries, inform those individuals of your choice. You should also give them all the necessary information to claim the life insurance policy payout.  You can also have several primary beneficiaries and multiple contingent beneficiaries.

If All Beneficiaries Die 

What if all the beneficiaries die before they can receive the payout? In this case, the payout will likely go to the policyholder's estate. Whoever the policyholder designated to receive an inheritance from them can also receive the policy payout after all estate debts and taxes are paid.

If One Primary Beneficiary Dies 

If one beneficiary dies but there are others, what happens next depends on the laws of the policyholder's home state. Sometimes the heirs of that one beneficiary will receive their share of the payout. At other times, the payout will be divided among the remaining beneficiaries. You don't want to go through the probate process. Naming beneficiaries will make your life insurance policies non probate assets.

24-Hour Beneficiary and Policyholder Death 

In rare cases, the primary beneficiary and the policyholder will die within 24 hours of each other. In such situations, the insurer will work hard to determine who passed away first. This will determine who will receive the final payout.

If the beneficiary dies first, any other primary beneficiaries or any contingent beneficiaries will receive the payout. If the policyholder dies first, the primary beneficiary's heirs will receive the payout or shares of it.

Arizona Estate Planning Attorneys 

Make sure that your contingent and primary beneficiaries are people that you trust to handle your money and affairs wisely. You shouldn't want to give the insurance payout to a person who will waste it or worse, kill themselves on the process. You also want to make sure that chosen beneficiaries will take care of other family members as well.

Also, if you need help with estate planning in Arizona, consider using our services. At Citadel Law Firm, we provide experienced lawyers who offer the best services. Schedule a free consultation with us using one of the methods on this page.

Call (480)565-8020 or click here to schedule your free estate planning consultation. We will be pleased to help.