What happens when your life insurance beneficiary dies before you?
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The benefits that come with your life insurance are intended to help financially support your loved ones after you pass away. When you purchase a life insurance policy, you are required to name the beneficiaries who will get the death benefit after you are gone. There are typically no limits to the number of beneficiaries you can name on your life insurance policy, meaning that you can generally name as few or as many beneficiaries as you want, though it will depend on the type and the terms of your policy.
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Whole life insurance combines life insurance with an investment component.
- Coverage for life
- Tax-deferred savings benefit if premiums are paid
- 3 variations of permanent insurance: whole life, universal life and variable life include investment component
Term life insurance is precisely what the name implies: an insurance policy that is good for a specific term of time.
- Fixed premium over term
- No savings benefits
- Outliving policy or policy cancellation results in no money back
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In general, most policyholders expect the life insurance beneficiaries they name to live longer than the policyholder will. However, there may be certain cases in which a named beneficiary dies before the death benefits have been paid out on your policy. If this happens, it will leave a void that requires proper documentation to fix, as updates will need to be made to the policy. Otherwise, it could result in legal hassles and disputes when the time comes to disperse the policy’s death benefits.
What happens when a sole beneficiary dies?
If you are the insured on a life insurance policy, you will have to name at least one primary beneficiary in order for the life insurance carrier to accept your application and implement coverage. 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 a 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 Internal Revenue Service or other lending institutions may try to recoup their money by placing a claim on your estate.
In extreme cases, your friends, relatives or even business associates may try to get your money for themselves and can become embroiled in a courtroom battle over your estate that could last for several years. 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 and insurance professionals strongly recommend that you name at least one contingent beneficiary and even a tertiary beneficiary in some cases. This can prevent unnecessary litigation and legal disputes among your loved ones.
What happens if one of multiple beneficiaries dies?
If you have named more than one primary beneficiary, or if the primary beneficiary is deceased and you have more than one contingent beneficiary and one of them has died, 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.
For example, you could name your spouse and your sibling or children as co-primary beneficiaries with each of them getting half of the death benefit. If one of them is deceased, 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 has died, 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 probate as 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 or partnership 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 intended, the following steps may be helpful:
- Name a contingent beneficiary: Having a contingent beneficiary listed on your policy is one of the most 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 death benefit funds are 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 become an adult, you may also choose to create a revocable trust where the death benefit funds will be held until they are old enough.
- Keep beneficiaries informed: 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 about the insurer and policy terms to allow them to make a claim to the money after your death without delay.
Per stirpes versus per capita distribution
The distribution of your death benefit can either 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 has died before you, 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 descendants 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
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Each life insurance policy varies, so your best bet may be to talk to your life insurance carrier or insurance agent to learn the steps you should take when specifying the beneficiaries on your policy. If your life insurance agent is unable to assist you with this, it may be helpful to consult with an estate planning attorney to have the process explained to you.
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Creditors may be able to lay claim to the death benefit paid out after your death, but that’s typically only if your death benefit is paid into your estate. In other words, this scenario typically only happens if you don’t have a beneficiary named on your policy. If you have a properly named beneficiary on your policy, then the death benefit goes directly to the designated person(s) or organization, and the creditor has no legal recourse to obtain it.
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Your life insurance carrier or insurance agent can guide you through the process of adding or changing a beneficiary on your existing life insurance policy. Typically, you will either have to fill out a form, either on paper or online, or you may be able to do it over the telephone. Some insurers may also require the change form to be notarized in order for it to be binding. The exact procedure varies by carrier and policy type.
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