Life Insurance Policy Beneficiaries

Class Designations

A life insurance owner can also designate a "class," or group, of beneficiaries, as opposed to naming each individually. For example, "my children" or "my grandchildren" are class designations. Older policyowners commonly use this approach when they want a portion of the policy's proceeds to be paid to grandchildren not yet born.

Under a policy's facility of payment provision, what does an insurer do with the death benefit? The insurer holds the funds in trust until the insured's estate is probated. The insurer names a blood relative or someone with a valid claim as the new beneficiary. The insurer keeps the money. The insurer transfers the money to the state.

The insurer names a blood relative or someone with a valid claim as the new beneficiary.

Facility of Payment Clause

To cover the rare cases in which a valid beneficiary is not available, most life insurance policies contain a facility of payment clause that allows the insurer to pay the death benefit to a person or entity of its choosing. This clause is most common with group life or industrial policies but may also be found in ordinary life policies. There are two common situations in which the facility of payment clause is applied: The beneficiary died before the policyowner and no contingent beneficiary was named. The beneficiary is a minor and no adult beneficiary is named. In these cases, the insurer will look for the nearest blood relative or someone with a valid claim to be the new beneficiary. As a last resort the insurer will pay the proceeds to the insured's estate, and the probate process will ultimately determine who gets the money

What is the primary difference between a revocable and an irrevocable beneficiary? the company's responsibility to notify the insured about any changes in its financial condition the policyowner's responsibility to pay the premiums the requirement for the insurer to tell the beneficiary if the insured has moved the policyowner's ability or inability to change the beneficiary designation.

the policyowner's ability or inability to change the beneficiary designation. The main difference between a revocable and an irrevocable beneficiary is the policyowner's ability or inability to remove the beneficiary. A policyowner can remove a revocable beneficiary at any time. The policyowner can only remove an irrevocable beneficiary if this beneficiary agrees.

Beneficiary Designation Options

Insurance companies do not restrict a life insurance applicant's selection of a beneficiary. The policyowner can choose a natural person such as a spouse, a child, or children. Or, the beneficiary can be a legal entity, such as a corporation, partnership, or trust. Insurable interest is not a factor when selecting the beneficiary. (Insurable interest is required only in the relationship between the policyowner and the insured, and with life insurance only when the policy is issued.) In addition, the policyowner has a range of beneficiary classifications to consider. Each addresses a different possibility that may be important to the policyowner.

Common Designations

individuals—The policyowner can name one person as the sole beneficiary. Or, the policyowner can name joint beneficiaries or multiple beneficiaries to share the proceeds. If more than one beneficiary is named and the proceeds are to be paid jointly, the policyowner can determine how much each is to receive. Each may receive equal shares, or one might receive more than the other or others. The decision is entirely up to the policyowner. businesses—Life insurance is commonly used in business situations. In these cases, a business is often named the beneficiary of a policy on the life of a business owner or a key executive. trusts—A trust is a legal entity established to own and hold property or assets for the benefit of another person or group of people. A trust may be designated the beneficiary of a life insurance policy. In this case, a trustee manages the policy proceeds for the trust's beneficiaries. estates—Estates can also be named as beneficiaries. In these cases, the policy proceeds are paid to the executor or administrator of the insured's estate at death. The proceeds typically pay estate taxes, final expenses, and other outstanding debts. This designation can prevent the estate from having to sell assets to pay such expenses. The main disadvantage to this type of designation is that it places the policy proceeds into the estate. Here, the proceeds are subject to the claims of creditors and estate taxes. charitable organizations—Naming a charity as the beneficiary of a life insurance policy is a common practice. Through the insurance contract, proceeds are paid directly to the charity. They do not pass through probate or become assets of the estate.

Managing Multiple Beneficiaries

Most applicants name multiple beneficiaries, either to share the death benefit or to make sure there is a "back-up" in case the primary beneficiary is not alive when the insured dies. Carefully designating life insurance beneficiaries is important because the insurance company must follow the policyowner's instructions precisely. Attention must be given to the order of beneficiaries and their succession; and share of the proceeds each will receive, if more than one beneficiary is named.

As a general rule, insurers do not pay death benefits to designated beneficiaries who are minors because minors are incapable of managing large sums of money. the risk is too great that an adult will take advantage of the minor. minors do not have the legal capacity to sign a binding receipt for the funds. federal law limits the amount of money that may be paid to a minor.

minors do not have the legal capacity to sign a binding receipt for the funds.

Common Disaster Provision

All life insurance policies contain a common disaster provision. This provision identifies how the policy's proceeds will be paid if the insured and the primary beneficiary die at the same time (e.g., in an automobile accident). To understand the importance of the common disaster provision, imagine a scenario in which the insured (husband) and the primary beneficiary (wife) are both killed in a car accident. This is the second marriage for both husband and wife, and both have children from their previous marriages. They have no children in common. The insured's children from his first marriage are the contingent beneficiaries. Assume the husband dies instantly, and the wife dies several hours later in the hospital. If the wife were deemed to have survived the husband, even for a moment, then proceeds would be payable to the wife's estate, and her children might be the ultimate recipients of the policy proceeds. This arrangement would probably violate the insured's intentions, since he has named his children as the contingent beneficiaries. The common disaster provision solves this dilemma. The common disaster provision stipulates that if the primary beneficiary does not survive the insured more than a minimum period of time (commonly five days) following a common accident, then proceeds are payable to the contingent beneficiary. A life insurance policy's common disaster provision conforms to the Uniform Simultaneous Death Act, which most states have adopted. This Act states that absent proof to the contrary, the beneficiary is presumed to die before the insured if deaths occur nearly simultaneously from a common accident. To remove all doubt over who died first, most states stipulate that beneficiaries must outlive the insured by a minimum period of time for the proceeds to be paid to the beneficiary's estate. Most states require a 120-hour survival period. In the car accident example, the wife's estate would receive the policy proceeds only if she survives at least 120 hours longer than the husband following the accident. If she dies within the 120-hour period, policy proceeds would be paid to the contingent beneficiaries (i.e., the insured's children).

Revocable and Irrevocable Beneficiaries

In addition to being designated as primary or contingent, beneficiaries can also be named as either revocable (changeable) or irrevocable. A revocable beneficiary (the most common) has no rights in or to the policy during the insured's lifetime. A revocable beneficiary has only an expectancy that he or she may receive the death benefit. The policyowner can change revocable beneficiaries at will. No notice or permission from the beneficiary is required. Furthermore, the policyowner can change or remove a revocable beneficiary any time during the insured's lifetime. The policyowner need simply provide written notification to the insurance company. In contrast, an irrevocable beneficiary has a vested interest in the policy. Without the irrevocable beneficiary's written consent, the policyowner cannot change a beneficiary who has been named irrevocably. Furthermore, the policyowner cannot change anything in the policy that affects the rights of the irrevocable beneficiary without first getting the beneficiary's consent. For example, the policyowner cannot make a policy loan or surrender any part of the cash value without the consent of the irrevocable beneficiary. The irrevocable beneficiary can be removed only with his or her signed consent. The only exception is if he or she dies before the insured, in which case, the policyowner can designate a new beneficiary, which may be revocable.

Spendthrift Clause

The spendthrift clause is another common life insurance policy provision. It states that creditors cannot claim any of the death proceeds before they are paid out to the beneficiary, thus preventing the beneficiary's creditors from forcing the insurer to pay the death proceeds directly to them (the creditors). This provision is usually elected with the insurance application, but some insurers permit policyowners to add it even after policy issue. Note that this clause protects only death benefit proceeds as they are paid from the insurer to the beneficiary. It does not protect proceeds once they are in the beneficiary's possession. The spendthrift clause also protects beneficiaries from themselves. It gives the policyowner the right to stipulate the settlement option that will be used in distributing policy proceeds. When a spendthrift clause is in effect, the beneficiary cannot change the settlement option. Instead, the beneficiary must abide by the settlement option the insured chose.

Minor Named as Beneficiaries

While the policyowner is free to designate any person or entity as the policy's beneficiary, there may be certain consequences if the beneficiary is a minor. As a general rule, insurance companies do not pay the proceeds of a life insurance policy to a minor because minors do not have the legal capacity to sign a binding receipt for the funds. Nor does the minor have the legal capacity to release the insurance company from its commitment. For these reasons, the insurer normally requires the court to appoint a legal guardian before paying out proceeds to a minor child. (A surviving parent does not automatically qualify as a guardian for his or her children. The surviving parent may be responsible for the child's person. However, he or she is not automatically or legally responsible for the child's property.) If a policyowner wishes to name a minor as beneficiary, it is recommended that the policyowner instead create a trust for the minor's benefit and designate the trust as beneficiary. The trust document can stipulate how and when the proceeds are to be made available to the minor.

Per Stirpes vs. Per Capita

Sometimes a policyowner wants to designate certain beneficiaries but also make arrangements in case one or more of those beneficiaries predecease the insured. This is possible through the use of per stirpes and per capita beneficiary designations: per stirpes—Death benefit proceeds are shared equally by a class or group of individuals (e.g., the insured's adult children, or the insured's brother and sister, or the insured's friends Tom, Dick, and Harry), and if one of them predeceases the insured, then his or her share passes down to his or her children (if any). per capita—Death benefit proceeds are shared equally by a class or group of individuals (e.g., the insured's adult children, or the insured's brother and sister, or the insured's friends Tom, Dick, and Harry), and if one of them predeceases the insured, then his or her share is divided equally among the surviving beneficiaries. No share of the proceeds is passed down to the deceased beneficiary's children. For example, suppose that Aaron, Ben, and Carl are primary and equal beneficiaries of the $300,000 insurance policy on the life of their father, Bill. Aaron dies before his father, leaving two children, Beth and Robert, as survivors. If the terms of Bill's life insurance policy designated the death benefit per stirpes, Aaron's $100,000 share will pass equally to his two children upon Bill's death. Beth will receive $50,000, and Robert will receive $50,000.

Which statement regarding the "spendthrift clause" of a life insurance policy is NOT correct? The spendthrift clause protects only death benefits paid in installments or under the interest-only option. The spendthrift clause keeps the beneficiary's creditors from forcing the insurer to pay them the death benefit. The spendthrift clause keeps beneficiaries from claiming any death benefits until the insurer checks their personal and business credit histories. The spendthrift clause keeps the beneficiary from changing the settlement option or alienating the funds.

The spendthrift clause keeps beneficiaries from claiming any death benefits until the insurer checks their personal and business credit histories.

Order of Succession: Primary vs. Contingent Beneficiaries

Beneficiaries may be designated primary or contingent. The primary beneficiary is the first person (or class of persons) in line to receive the death benefits. Primary beneficiaries receive these benefits if they are living when the insured dies. The primary beneficiary can be one person (a spouse), multiple persons (such as named children), or a class of people (e.g., children of a marriage). If more than one person is named as primary beneficiary, the portion of the proceeds each is to receive should be clear. For example, a person may name his wife and two children as joint beneficiaries of his life insurance policy. The wife might be designated to receive one-half of the proceeds and each child to receive one-fourth. Though the amounts they receive are different, all three are considered primary beneficiaries. The contingent, or secondary beneficiary is the next person (or class of persons) in line to receive the policy proceeds. Contingent beneficiaries receive the proceeds if the primary beneficiary is removed or dies before the insured. Several levels of contingent beneficiaries are possible. In such a case, each level of contingent beneficiaries has a lesser claim to the policy proceeds than do those in the level above it. The next level below the contingent beneficiary is sometimes called a tertiary beneficiary