A policyholder can — and should — name more than one beneficiary.
A planner is derelict in duty if the policyholder is not told of the privilege and advantages of naming both a primary beneficiary, which can be more than one person or entity, and one or more contingent or secondary beneficiaries.
The primary beneficiary is the first person (or class of persons) in line to receive the proceeds when the insured dies. But to be entitled to the proceeds, the primary beneficiary must be living on the date the insured dies. Otherwise, the insurer pays the proceeds to the class of beneficiary whose interest is contingent upon surviving both the insured and the primary beneficiary. This class is appropriately called the contingent beneficiary.
What Your Peers Are Reading
The policyholder may name more than one individual, entity, or combination of individuals and entities in each beneficiary class. For example, a policyholder may name his spouse if living and otherwise his two children. Where more than one beneficiary is in a given class, they typically share the proceeds equally unless the policyowner specifies otherwise in the beneficiary designation.
Policyholders can even name a third level of beneficiaries or final beneficiaries in case all beneficiaries in a higher class have predeceased the insured. Often, parents, nieces, nephews, cousins, or a charity such as a church, synagogue, or university are named at this level. Alternatively, the policyholder can designate the estate of the insured and the proceeds will become part of the probate assets where the insured’s will (or, if no will exists, the state’s intestate laws) determines the disposition.
Usually, a lower class’ rights are extinguished if the policy makes payments to members of a higher class. For instance, a contingent beneficiary will receive nothing if the primary beneficiary is alive when the insured dies. Likewise, the final beneficiary has no expectancy of a share of the proceeds if the contingent beneficiary survives the insured and the primary beneficiary predeceased the insured. Even if proceeds are taken in installments, once they are payable to a higher class of beneficiaries, any remainder payable at the death of a member of that higher class will be payable to the decedent’s estate (or contingent payee) rather than to the next class of beneficiary.
Even where it seems inherently unfair, the insurer is almost always held by the courts to be bound to pay the proceeds to the named beneficiary. There are numerous cases where the proceeds were payable to a spouse long divorced by the insured because the policyholder had forgotten to designate a new beneficiary.
Specificity is essential. The beneficiary designation should describe the person with sufficient clarity and certainty so that the insurer can easily identify the proper person, make payment, and obtain a valid release.
What follows are 11 special circumstances that may arise with beneficiaries, and advice about how to manage these particular cases.
Editor’s Note: This excerpt was taken from “Tools & Techniques of Life Insurance Planning,” which delivers detailed information about the entire range of life insurance products that can be used by estate and financial planners in a wide variety of circumstances. It includes planning techniques for retirement income needs, estate and gift tax avoidance, estate liquidity needs, and long-term care planning.
It will be less likely that a life insurance settlement is held up in court when beneficiaries are specifically named instead of referred to by relations such as “my wife” or “my husband.” (Photo: iStock)
1. The policyholder has specifically named a spouse.
Courts look to the person’s name rather than description as husband or wife or fiancée. So even if that person is no longer a husband, wife, or fiancée when the insured dies, absent specific state law to the contrary, legal precedent dictates that the proceeds will still be payable to the named person. Courts do not pass on the morality of its citizens and recognize the right of the policyholder to make any beneficiary designation he or she pleases.
2. The policyholder fails to specifically name his or her loved one.
What if the beneficiary is simply referred to as “my husband” or “my wife” without using a specific name? Here, proceeds are payable to the person who, at the time of the insured’s death, meets that description.
There are both advantages and disadvantages to this designation. Obviously, if the policyholder changes marital status, a new wife would be benefited under a “to my wife” designation. This is probably the result desired. On the other hand, the ambiguity and therefore litigation potential is significantly enhanced. The best course of action is to properly name and describe each beneficiary, back up each beneficiary with a contingent beneficiary, and quickly change beneficiary designations when marital status changes.
Naming beneficiaries can get dicier as the policyholder’s family expands. (Photo: iStock)
3. The policyholder names each child individually, and describes the relationship.
This is the clearest and safest approach. But a child born after the beneficiary form is signed may be excluded.