Life insurance benefits are meant to help support your loved ones financially after your passing. You can name as many beneficiaries on your life insurance policy as needed and the death benefit will be distributed among them once you are gone, according to your policy type and parameters.
Typically, a life insurance beneficiary is expected to live longer than the insured, but there may be instances when the beneficiary dies before the benefits have been paid out. A life insurance policy has similarities to a will — if a beneficiary dies and leaves a void, proper paperwork is needed to ensure it is filled to avoid legal hassles and disputes. If the sole beneficiary — or one of the several named on the policy — passes before the insured, necessary changes should be made to help prevent future disruptions in your financial planning.
What happens when a sole beneficiary dies?
If you are the insured on a life insurance policy, you will have to name at least a primary beneficiary in order for the life insurance carrier to accept your application. But if your primary beneficiary dies before you do, then the death benefit would be paid to any contingent beneficiaries that you named on your application.
If there are no contingent beneficiaries, then the death benefit will most likely be paid directly into your estate. If this happens, then the full amount of the policy’s death benefit will go through the probate court, where it is open to public scrutiny and can be seized by creditors. If you have outstanding debts, such as back taxes, a mortgage or student loans, the IRS or other lending institutions may try to recoup their money by placing a claim on your estate.
In extreme cases, your friends and/or relatives may try to get your money for themselves and can become embroiled in a courtroom battle over your estate. In this event, your money may end up in the hands of someone you didn’t intend to leave it to. For this reason, financial planners strongly recommend that you name at least one contingent beneficiary and even a tertiary beneficiary in some cases. This can prevent unnecessary litigation, legal spats and disputes among friends and relatives.
What happens if one of multiple beneficiaries dies?
If you have named more than one primary beneficiary, or if the primary beneficiary dies and you have more than one contingent beneficiary and one of them dies, then the death benefit proceeds from your policy will typically be redistributed among the remaining beneficiaries. The manner of redistribution will depend on whether it’s done on a per stirpes or per capita basis (see below).
For example, you could name your spouse and your sibling as co-primary beneficiaries with each of them getting half of the death benefit. If one of them dies, then the other one will get the entire death benefit. Or you could have three primary beneficiaries with each of them getting a third of the death benefit. Then, if one of them dies, the other two would each get half of the death benefit. If you don’t want your money to be distributed this way, then you’ll need to take steps beforehand to ensure that your death benefit is distributed in the manner that you desire.
What happens if the beneficiary is an organization that no longer exists
If you have named an organization as the beneficiary of your life insurance policy, and then by the time you die the organization no longer exists, then a couple of different scenarios could happen. The first possibility is that your death benefit would be paid to your estate, where it would be subject to all of the disadvantages described previously. The second possibility is that another organization that has superseded the organization that you named as your beneficiary may step forward and claim the money.
For example, you could leave your money to a closely held business that functioned as a limited liability company. and then the company restructures itself into a C corporation and goes public. The new company may come forward with legal documents showing that they now own the rights to all receivables that were held by the business in its previous form. The new company could then be awarded the death benefit.
How to protect beneficiaries
The departure of one beneficiary from a life insurance policy should typically not have a negative impact on the other beneficiaries. To help ensure the named beneficiaries receive your death benefit as you intend, the following steps may be helpful:
- Name a contingent beneficiary: Having a contingent beneficiary listed on your policy is one of the more effective ways you can be prepared for the event of a primary beneficiary passing prior to the death benefit on a policy being distributed. Contingency beneficiaries prevent your death benefit from going to your estate.
- Designate proper proportions: If you have multiple beneficiaries but the money is not to be split equally, then you are typically required to state in the policy the exact percentages that each will receive. Otherwise, it might cause legal disputes at the time of settlement.
- Update policy: Whether you get married, start a family or lose a spouse, life altering events make it necessary to update your life insurance policy to include the current contact information of your beneficiaries. If you want a minor beneficiary to get the money only after they are an adult, you may also choose to create a revocable trust where the amount will be held until they are old enough.
- Keep beneficiaries in the know: A life insurance beneficiary does not automatically get a death benefit — they are required to make a claim to the money with sufficient proof. Make sure your beneficiaries know that they are included in your life insurance policy with all the details of the insurer to allow them to make a claim to the money after your death.
Per stirpes versus per capita distribution
The distribution of your death benefit can be per stirpes or per capita. The former involves the money being divided equally between descendants if the primary beneficiary dies. For example, if the money is to be split between two of your children but one of them dies untimely, the surviving beneficiary still gets their intended share but the other share is divided equally among the children of the deceased beneficiary.
In the same situation but under a per capita arrangement, the death benefit would be split equally between the remaining primary beneficiary and each of the descendents of the other beneficiary. This can potentially result in the primary beneficiary getting less than what was originally intended.
|Per stirpes||Per capita|
|Generational distribution of benefit among descendants||Equal distribution of benefit among surviving beneficiaries|
|Keeps assets within the family||Assets can be passed on outside the family|
|Eliminates the need to update policy after major life events||Requires adjustment of policy|
Frequently Asked Questions
How can I make sure that my life insurance policy is divided up between my beneficiaries on a per stirpes basis?
Your life insurance carrier should be able to tell you what you need to do when you specify the beneficiaries on your policy. If they cannot do so, consult with an estate planning attorney who can explain this to you.
If I have unpaid debts when I die, can creditors seize my death benefit?
This can only happen if you have no beneficiary named on your policy. If your death benefit is paid into your estate, then yes, creditors can lay claim to your money. But if you have a beneficiary properly named on your policy, then the death benefit will go directly to that person or organization and the creditor will have no power to obtain it.
What if I need to change my beneficiary?
Again, your life insurance carrier can tell you what you’ll need to do to add or change a beneficiary. You’ll either have to fill out a form, either on paper or online, or you may be able to do it over the telephone. The exact procedure varies by carrier and policy type.