Explain the difference between primary and contingent beneficiaries.

The distinction between primary and contingent beneficiaries is pivotal in life insurance policies and estate planning. Primary beneficiaries are the individuals designated to receive the death benefit directly upon the insured's passing. In contrast, contingent beneficiaries come into play only when the primary beneficiaries are unable to receive the benefits—whether due to death, disqualification, or legal issues. This hierarchical structure ensures that there is a clear line of succession for the benefits, providing a plan for the distribution in various circumstances.

This understanding highlights the role of contingent beneficiaries as a secondary layer of protection in an estate plan. If the primary beneficiary is unavailable for any reason, the benefits will then be distributed to the contingent beneficiary. This ensures that the insured's intentions for who should benefit from the policy can still be honored in the event of unforeseen circumstances affecting the primary beneficiaries.

The other options misrepresent the relationships and definitions involved, with one indicating restrictive definitions of who can be a beneficiary, another inaccurately stating that a contingent beneficiary always receives a percentage, and the last focusing unnecessarily on the relationship to the policyholder instead of the functional role of beneficiaries.