When you purchase a life insurance policy, you are required to designate your policy’s beneficiaries. This is important because it ensures that if the insured were to pass away relatively soon after the policy’s purchase, there would be little trouble in determining who should receive the death benefit. It can be problematic, however, when policy owners treat their beneficiary designations as “set-it-and-forget-it,” because circumstances change over time and a decision made at the policy’s inception may not meet the desires of the policy owner years later.
Accounts and assets that have named beneficiaries, including life insurance policies, are automatically passed to those beneficiaries after death — any wishes for those accounts or assets that are written into a Last Will and Testament are null and void, because those accounts and assets pass to the designated beneficiaries outside of the deceased’s estate, and the will does not apply to them. This is true regardless of whether the will is more up to date than the beneficiary designations.
For this reason, it’s important to regularly check in on beneficiary designations for the accounts and assets that require them. Owners can typically set beneficiary designations for life insurance policies, retirement accounts, certificates of deposit, brokerage accounts, and savings accounts. Updating beneficiaries is normally as simple as contacting the institution that manages the account — these updates are relatively easy transactions and may be able to be completed online or through an app.
Primary vs. Contingent Beneficiaries
There are two types of beneficiaries:
- Primary beneficiaries: Survivors who are designated to receive all or a portion of the death benefit upon the death of the insured.
- Contingent beneficiaries: Beneficiaries who receive all or a portion of the death benefit if any primary beneficiaries are no longer living at the time of the insured’s death.
If you have multiple primary beneficiaries, you can divide the benefit equally among them, or designate how much of the death benefit each gets. The same is true for contingent beneficiaries. Typically, if you do not make a specification or if you have multiple principal beneficiaries and one passes away before the policy is paid out, the death benefit will be split equally among the remaining principal beneficiaries.
Having contingent beneficiaries listed on a life insurance policy is a good first step toward ensuring that the death benefit will be paid to designated individuals when the time comes — if something were to happen to the primary beneficiary, the benefit automatically passes to the contingent beneficiary. However, simply having designated primary and contingent beneficiaries doesn’t ensure that the benefit will be paid out as the policy owner wishes if the beneficiary designations are outdated.
What happens if beneficiary designations are outdated?
There are a variety of reasons that a policy’s beneficiary designations could become outdated — some of the more common ones are explained below. Often, it is a matter of the policy owner forgetting to make updates to the policy after experiencing a life change (e.g., a death, divorce, or marriage).
When an insured passes away, the individuals listed as beneficiaries of the policy, regardless of when they were designated (at the policy’s inception or as amended by the policy owner later on), are the individuals who will receive the death benefit. The paperwork on file with the insurance company determines the beneficiaries, even if the policy owner meant to update them or has something in writing stored elsewhere.
What happens to beneficiary designations in the event of divorce?
In cases of divorce, the court may order either party to maintain the other as the beneficiary of a life insurance policy for the purposes of providing child support or alimony. In the event that a marriage dissolves and there are no child support or alimony payments to be made, the court may suggest that existing insurance policies be terminated, or the beneficiaries updated.
In some states, designation of a spouse as the beneficiary of a life insurance policy is invalidated by the couple’s divorce. Elsewhere, a former spouse who is listed as the beneficiary of a policy can claim the death benefit at the time of the insured’s passing. It is exceptionally important to talk with both a lawyer and an insurance company representative during a divorce to ensure financial protection for each party.
What if all beneficiaries are deceased?
Setting a contingent beneficiary is a start, but there is still a chance that all listed beneficiaries on a life insurance policy could pass away before the insured’s death, leaving the policy without a beneficiary. In this case, the death benefit is usually payable to the insured’s estate. Assets contained within an estate are distributed according to the deceased’s will, or, in the absence of a will, to the deceased’s next of kin according to state law.
If a life insurance death benefit passes through the insured’s estate, it can impact the taxability of the death benefit. Typically, proceeds from a life insurance policy pass to the policy’s beneficiaries outside of probate and tax-free. Once the funds become part of an estate, however, they are subject to estate taxes. They also can be accessed by creditors in the event that the insured has unsettled debts that must be paid at the time of their death. Overall, this can decrease the amount of the death benefit that survivors of the insured actually receive.
What if a beneficiary dies before receiving the death benefit?
If an insured has passed away and a beneficiary has initiated a claim, but then the beneficiary also passes away, the death benefit will be paid to the beneficiary’s estate. As above, when a death benefit is paid to an estate, it becomes subject to estate taxes and can be accessed to pay off the beneficiary’s debts.
Any remaining funds in the estate are distributed to the beneficiary’s beneficiaries as listed in their will or, if there is no will, by state law.
What if an insurance company cannot find a policy’s beneficiary?
When an insurance company receives notice that an insured has passed away, the company will try to contact the beneficiaries on file. For this reason, it’s important that beneficiary information stay up to date with the insurer. Providing accurate birthdays and Social Security numbers, as well as current contact information for each beneficiary, can help the process of locating a beneficiary go smoothly.
In the event that an insurance company cannot find a beneficiary, the beneficiary’s portion of the death benefit may end up being reported as unclaimed property and transferred to the beneficiary’s last known state of residence. The beneficiary cannot claim the death benefit from the insurer after the insurer has turned the funds over to the state, because the company no longer has custody of the money. However, by proving their identity, a beneficiary is generally able to claim ownership of the funds after contacting the state.
Updating beneficiaries is simple, but it’s a task that can sometimes fall through the cracks. Make it a habit to review your life insurance policies annually and make any necessary updates at that time. At Navy Mutual, our Customer Service representatives are happy to process beneficiary changes on your behalf. To request a change, please log in to your Customer Portal account or call 800-628-6011.