What happens if your life insurance beneficiary dies before you?

If you have life insurance, you know that you were required to pick a single or multiple beneficiaries when you purchased your policy. When you die, the beneficiaries receive the payout from the policy. Usually, beneficiaries are family members, friends or organizations that you care about and hope to protect financially when you are gone. But sometimes, life throws you a curveball and it becomes necessary to determine who gets the money if the beneficiary passes away before the insured person dies. Bankrate’s insurance editorial team explains what happens if your beneficiary dies before you do.

What happens when a sole life insurance beneficiary dies?

We know what happens when the insured person in a life insurance policy dies before the beneficiary: the beneficiary receives a payout from the insurer for the full amount of the policy, minus any loans that were taken against the policy. However, if the beneficiary dies, who gets the money? In that case, the payout will be split among any contingent beneficiaries named when the policy was purchased.

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 life insurance 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, let’s say you left money to your beloved alma mater, the college you graduated from years ago. But recently that college, after years of financial struggle, ceased to exist as a separate entity and was absorbed by a larger university nearby. The university may have a claim on your policy, since they now own all the assets of the college and have continued to work with its students, faculty and property.

How to update your life insurance 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 (or two) 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. Per stirpes means the money will be 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 go to the remaining primary beneficiary.

Frequently asked questions

• • What happens if the owner of a life insurance policy dies before the insured?

    Although frequently the owner and insured are the same person, that is not always the case. For example, you may purchase a policy, making you the owner, but the insured person is your spouse. In this case, the death benefit is only paid out when your spouse dies, not you as the owner. If the owner and the insured are the same person, however, then the death penalty will generally be paid out on that person’s death.

  • How can I make sure that my life insurance policy is divided up between my beneficiaries on a per stirpes basis?

    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.

  • If I have unpaid debts when I die, can creditors seize my death benefit?

    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.