Understanding Contingent Beneficiary And How To Protect Your Wealth & Grow Savings For Generations

So what's very common that we see in, you know, especially in a household is that we have a husband and a wife or spouses. And when there's a death on one spouse, the other spouse is generally speaking the primary beneficiary. So tax free money shows up and it shows up for the primary spouse. So whoever the primary beneficiary is, it's going to receive all that tax free capital.

Hi. If Richard here and this little video is to help explain a little bit about the difference between primary and contingent beneficiaries, a lot of times people are typing into Google or searching to learn a little bit more, have a better understanding. What exactly is a contingent beneficiary and how does it apply to me? Well, so in our example we're going to talk specifically about life insurance. Now beneficiaries and beneficiary designations can show up in a variety of forms in your life. It can be through different investment accounts you have or registered accounts such as RRSP or a TFSA, etc. But we're just going to highlight on insurance for the purpose of our conversation today, because that's one of the primary formats people are thinking about this in. And in general premises, the difference between primary and contingent is very similar across the board for other types of areas where you might see this come up. So primary contingent. So let's use an example I'll pinpoint on me. So hypothetically, let's say, you know, Richard gets taken out and he's no longer with us. I've graduated early and I have an insurance contract in place where there's a tax free death benefit that's going to pay out and it's going to pay out to the primary beneficiary. So what's very common that we see, especially in a household, is that we have a husband and a wife or spouses, and when there is a death on one spouse, the other spouse is generally speaking the primary beneficiary. So tax free money shows up and it shows up for the primary spouse. So whoever the primary beneficiary is, it's going to receive all that tax free capital. And in the event that something were to happen. So again, hypothetically, let's say my wife and I are together, we're in a car or in an airplane and we both are prematurely deceased. We are no longer around, we've died a little bit earlier than anticipated and now she's the primary beneficiary of my policy. Well, then there's no place for that money to go. So we need to have a contingent person nominated. So that's where often we see the kids come into play. There can be a variety of different people who are listed as a contingent beneficiary. We often see charities or churches as beneficiaries, both as primary and as contingent. It really just depends on what you're seeking to do in the event of who you want to receive capital when you're gone. So again, in my example, I have my wife listed primarily as the beneficiary in most cases. So if I pass away, she would receive all the funds on a tax free basis of an insurance contract. In the event that she is no longer available because she's pre deceased me or something, then the contingent beneficiaries are who become nominated. Now here's where things get a little bit tricky. We often will find that there is more than one. So more than one primary beneficiary. You could have a number of people listed as a primary beneficiary. So I'll give you another example. Let's say that I have my parents listed as a primary beneficiary and my wife now. And then I have my children as contingent. So primaries are up here and the contingent are down here. So if I have my spouse, my wife as a primary, and let's say she's on for 80%, she's going to receive 80% of the benefit. Then I list, you know, one of my parents, my mother for 10% and my father for 10%. They're all listed under this primary category because they're listed as primary. In the event that my wife and I pre decease everybody and my parents are still around because they're listed as the primaries, they would then equally split their 10% and 10%. They would now become the equal share to receive all of the primary benefit. If my children are listed as contingent beneficiaries, they actually wouldn't receive anything yet because the primary is going to get everything. So if you have multiple primary people, all of those primary people need to be extinguished or need to predecease you in some way before anything will fall down to who's listed as a contingent beneficiary. That's where often a lot of the confusion comes in, in understanding between primary versus contingent. All primaries listed need to need to no longer be available before a contingent beneficiary will receive anything. So that's a really important key point to understand. So if you're thinking about doing an assessment on any existing, whether it's investment accounts or insurance accounts, that you have always make sure you're clear who are the primaries you have designated and what is the thing that you want to see transpire on the back end. So you may even find that for an example.

You want to make sure that, let's say you have several older children and you want one of those children who's demonstrated to be the responsible one, let's call it. You want to have the responsible one receive the funds and then make sure it gets delineated to other children or grandchildren. Well, you can specify clear instructions in your will, which is generally independent. I mean, your insurance contracts, investment contracts, are separate. Your will is a legal document that binds your final wishes. So you can specify what you want to see transpire in your will with funds that are received. So as an example, I could specifically say in my will that upon my demise, with the insurance contract payout that's received by my spouse, my wife, and I've also listed, you know, my parents as 10% and 10%, what I want to see happen with that money is I want to see money appropriated to a college fund on my children. I want to see a portion of that money fund, an investment account for them on an annual basis for the next 10 years so that it doesn't just all disappear. I want to see that money is applied to pay off any outstanding debts. So I can make specific requests in my will that, ideally because it's a legal document, should be followed to the letter by the executor and the people who are going to be receiving funds. So that's how, if you want to have some instruction provided to any capital that shows up, you would indicate that those instructions and your final wishes essentially in the will document, and then the insurance would simply pay out to those individuals. And you need to make sure that they're getting the instructions quick enough from who's the executor of the will. So not to provide legal advice of any kind, of course, just again, talking about the flow of how things happen when someone is no longer with us. Then when we're getting into conversation about who's going to receive these monies from whatever the accounts are in the primary and the contingent format. Another thing that a lot of people don't know, especially in Canada, is you can choose to have on an insurance contract. You can choose to have an annuity become the primary beneficiary with the same life insurance company. And then there's a special piece of paper that goes with it. It's referred to as an annuity settlement option. Sorry for the air quotes annuity settlement option. And you can say, hey, I want my entire death proceeds. Let's just say it's a million dollars. I want the million dollars, the primary beneficiary, to be this annuity. And then in the annuity paperwork, you say, I want this annuity to pay a monthly stream of income to my spouse as well as pay a lump sum payout of, let's say, $300,000. Then I want to her to receive a, you know.

I don't know, $5,000 a month income for the next 10 years. And I also want her to receive an annual payout for the first four years of an extra $30,000 a year. So you can specify in that annuity contract so the, the proceeds actually stay with the insurance company. They fund a new, a new contract called an annuity. And then you are telling that annuity before you're, obviously before you're dead. It's going to be hard when you're gone. We were telling that annuity, how do you want to produce an income stream for the remaining individuals so the primary beneficiaries. And then again, you can layer that additionally to contingent beneficiaries. So there's a ton of great things you can do. Essentially, it's a way that you can, I mean, basically you can control the death benefit from beyond the grave. You just got to put some thinking into it before it happens. And you have to, you know, really make clear decisions about what you want your wishes to be. Another important thing that people don't realize when it comes to beneficiary designations, unless that beneficiary designation is irrevocable, other than in the province of Quebec, there's some different rules that are there and you'd need to speak to a licensed individual in that category, that territory. Unless a beneficiary is designated as irrevocable, you can change beneficiaries from time to time. They're revocable. You can revoke that beneficiary and change it to another individual. Irrevocable beneficiaries are used in select circumstances. Often that's situations where there's a need to make sure that perhaps you have, as an example, you might have a child that requires additional services or care or, you know, for whatever reason, perhaps they have a disability. And you may elect an irrevocable beneficiary for a certain portion of funds in that circumstance, or there's some variety of other ones as well. So important to be aware of those things. Make sure you check. So go do an assessment. Look at your insurance contracts, look at your investment contracts, do an assessment of who's listed as a beneficiary and verify if that's still reasonable. These are things you should be looking into on a regular basis, annually, probably at most, if, if not, certainly every couple of years. If you're like most people and you don't look at everything on an annual basis. Well, what often happens is life gets busy and things change and the investments change or the insurance changes or this changes. And then we tend to forget what we written, what we've written down. So always make sure you have that documented somewhere. Do an assessment of your financial junk drawer on a regular basis and see what needs to be updated and reach out to a qualified professional to have that assessment done. Thanks so much. I hope you found this enjoyable. You found a lot of great value out of learning about contingent primary beneficiaries, how they play a role in Canada. And if you want to get some more information, feel free. Check out the rest of the videos that we have available. You should see coming up next, videos showing up right away on the sidebar. Go ahead, click through that. Make sure to subscribe to the channel. And good luck on celebrating incredible financial life.