Life insurance can be used for many purposes. It can serve to protect the financial future of the primary income earner’s family, pay estate taxes and other debts of the deceased or facilitate the succession of a business. In all of these cases, the face amount of the policy is paid to the person or entity that is named as the primary beneficiary on the policy.
But what happens if the beneficiary dies before the insured does? Or what happens if there is more than one beneficiary and one of them dies? The answer to these questions can depend upon several factors, but in most cases, any possible ambiguity that could arise can be easily avoided with proper planning. A well-crafted estate plan will always take possibilities like this into account, so don’t hesitate to get with your financial advisor or life insurance agent if you’re unsure what would happen if you are to outlive your beneficiary or beneficiaries.
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
Fortunately, there are several things that you can do to ensure that your life insurance is distributed in the exact manner that you desire. The first and most obvious step that you can take is to make sure that you have named the people or organizations that you want to get your money as the correct beneficiaries. Be sure that all of their contact information is current and correct, and it’s probably a good idea to go over your policy periodically to make sure that everything in it is up-to-date.
But what if you want to attach certain conditions or circumstances to the distribution of your money? You may want to leave your money to your kids, who may have reached the age of adulthood and no longer need a guardian. But if you don’t feel comfortable leaving your money to them at this point, then you could have a revocable living trust drawn up that would hold the money for them until they get a little bit older and more responsible.
Per Stirpes Versus Per Capita Distribution
There may be a situation where you want to protect the children or other dependents of one of your beneficiaries in the event that he or she dies before you do. In that case, you would opt for a per stirpes distribution arrangement.
For example, you may have two primary beneficiaries; each of them would get half of your death benefit. One of your beneficiaries has two children while the other does not. You could name the two children as contingent beneficiaries, and under a per stirpes arrangement, your remaining primary beneficiary would get half of the death benefit and the children would get the other half (presumably with each of the children receiving a quarter of the death benefit).
Under a per capita arrangement, the death benefit would be split equally three ways between the remaining primary beneficiary and each of the kids. The kids would effectively receive more this way, and the primary beneficiary would get less. This would most likely not be what you intended to have happen.
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.