Beneficiary mistake #4: Backup Beneficiaries


Misunderstanding contingent beneficiaries
Most companies allow you to name a contingent (backup) beneficiary should your primary beneficiary pre-decease you. It is important to understand that contingent beneficiaries will only receive a benefit if ALL of the primary beneficiaries pre-decease you. For example, if you name your four children as primary beneficiaries equally and your eight grandchildren as contingent beneficiaries, and one of your children dies before you, his/her share will NOT go to his/her children. Instead, it will go to the remaining three surviving children.

Example: John Doe has two children, Jack and Jill. Jack has two children, Hansel and Gretel. Jill has two children, Jacob and Wilhelm. John has named his two children, Jack and Jill, as primary beneficiaries- 50% each. Then he has named his four grandchildren, Hansel, Gretel, Jacob, and Wilhelm as contingent beneficiaries- 25% each. Jack passes away before John, leaving behind his wife and Hansel and Gretel. Later, John dies.

In this example, Jill would receive 100% of John’s life insurance policy as the only surviving primary beneficiary. Jack’s two sons, Jacob and Wilhelm, would not receive any of Jack’s share of their grandfather’s life insurance policy. After Jill dies, the money will go to her own beneficiaries.

This can be avoided by using a per stirpes designation. Per Stirpes is a latin word meaning, “per issue” and is a legal term that would allow the deceased beneficiary’s benefit to go to his/her children

