Imagine receiving this letter:
RE Policy number AN20067
April 10, 2019
Dear Mrs. Wilson,
We have received your death claim for the above-referenced policy issued on 12/1/2001 in the amount of $1,000,000. Please accept our deepest condolences for your loss. We regret to inform you that this policy lapsed on June 1, 2018, due to non-payment. Notices for non-payment were sent to the address of record on April 1 and May 1 of 2018…..
To add to the horror of losing her lifelong partner is the revelation that Mrs. Wilson will not be able to support herself. Unintended lapse is just one of many reasons life insurance proceeds do not wind up going where they were intended. There are dozens, but this article will address the most common reasons.
Beneficiaries of life policies are listed as primary and contingent, or first and second. This way if the primary beneficiary is not living there is someone else who may receive benefits.
Minors: By far the most common mistake is where a person names his or her spouse first and children second or spouse first and estate second. Both are wrong! Minors are not legally permitted to take ownership over life insurance proceeds and thus, the state must create a trust fund, name a trustee and supervise the funds. Worse, the minors get 100% of the money when they reach the age of 18 whether they are capable of managing money or not. Another example: Husband and wife are in the same accident and the estate is named as a contingent beneficiary. This means the life insurance proceeds are paid out to the executor of the deceased person’s estate. If there is no will, the state is involved, if there is a will but no trust for minors, the state is also involved. The best option is spouse first, and trust for minors second. This requires proper planning. Do you want the state to determine who gets what and when?
Divorce: Often times when people get divorced, they forget to change the beneficiary of their life policies. The insurance company is going to pay out the death benefit to whoever was listed on the last beneficiary form on file. The former spouse is under no obligation to pay over the proceeds of this unintended mistake. There is little to no recourse in this instance.
The beneficiary is Invalid: If a beneficiary listed is deceased, the benefits are payable to the contingent beneficiary. If no contingent beneficiary is listed, the proceeds are paid to the estate of the deceased beneficiary or the estate of the insured (depending on the company). If the deceased had a valid will, the proceeds pass according to the will, if the deceased has no valid will the proceeds are distrusted by state law. Insurance policies may name a corporation as a beneficiary. If the corporation is no longer in existence when the policy is paid out, the proceeds may be up for grabs.
Beneficiary Was Changed: Occasionally the owner of a policy will change the beneficiary of their policy due to a feud or some legal reason and forget to change the beneficiary back after the issue is resolved.
A beneficiary is not the Intended Recipient: A policyholder may intend to leave his or her life insurance to a person or persons but not trust them with large sums. Instead, they name another family member (or friend) as beneficiary with the hope that they will “take care of” the intended person(s). This is a bad idea for many reasons and not uncommon. The person named as beneficiary may or may not distribute the funds as the owner intended, or they may be deceased or disabled when the proceeds are paid out. A better option is to name a trust to insure the money is distributed to the correct parties at the correct times.
Other Reasons: Less common but still problematic issues related to some sort of defect in a beneficiary designation. Misspellings or missing Jr., Sr, or III. in names can cause confusion. When an insurance company issues a policy, they do not check the beneficiary designations for accuracy. These issues come up after the fact. The company must be certain they are making payment to the correct party. If they are uncertain, the payment is held up. In the interim, fights, and even litigation erupts.