An important topic taught through our insurance license school is understanding what happens to a life insurance policy once an insured dies and what laws govern who receives the death benefit monies provided by the life policy.
A life insurance beneficiary is an individual who receives the policy’s benefit proceeds upon the death of the insured. The insured has chosen this individual, or individuals when he or she purchased the life insurance contract. The amount of benefit proceeds as well as distribution percentages are also chosen by the insured and can or cannot be altered during the insured’s lifetime, depending on the designation type that the insured has chosen at the time of policy issuance.
The life insurance beneficiary, designated by the insured, gains control of the death benefit after the insured dies. This beneficiary can be a person, institution, or charity and though insurable interest is not required to be a beneficiary, family members of the insured are usually named.
Distribution by Descent
Per stirpes rule – Death proceeds from an insurance policy are divided equally among the named beneficiaries. If a named beneficiary is deceased, his or her share then goes to the living descendants of that individual.
Per capita rule – Death proceeds from an insurance policy are divided equally among only the living primary beneficiaries.
Upon designating the policy’s beneficiaries, the insured can also indicate whether or not changes to the beneficiary can be made in the future. An insured can choose for the beneficiary designation to be either revocable or irrevocable.
A revocable designation allows the insured to change beneficiaries after the policy becomes in force, if he or she so chooses, without the consent of the beneficiary; While an irrevocable designation cannot be changed in the future without the consent of the beneficiary. Any policy ownership rights including future policy loans or policy collateral on a loan are controlled by the beneficiary, not the insured, though the beneficiary can give these rights back to the insured if the beneficiary so chose. Ultimate, these designations provide for protection of the policy’s proceeds and the long-term intent of the insured’s decision to purchase life insurance.
Most policies, though, have a revocable beneficiary designation, allowing the insured to control the policy and beneficiary designations over the life of the policy.
Beneficiary designations can be chosen in many different ways by a policyowner, and in return, insurance companies must adhere to these designations explicitly. Considering the possibility that a beneficiary may die before the insured, insurance companies advise policyowners to also designate contingent and tertiary beneficiaries.
3 Beneficiary Designations
1. Primary – Whether it be one or many primary beneficiaries, these individuals are first in line to receive benefits upon an insured’s death.
2. Secondary (Contingent) – Next in succession to the primary is the secondary beneficiary. As a secondary beneficiary, this individual only receives benefits if the primary beneficiary dies before the insured.
3. Tertiary (Contingent) – Being third in line, a tertiary beneficiary will only receive policy death benefits if both the primary and secondary beneficiaries die before the insured.
Life Beneficiary Clauses & Provisions
Incontestability provision – A required provision in all life insurance policies that provides for a period of time, usually 2 years, in which any incorrect information provided on a life insurance policy can be disputed by the insurance company. After this period of time has elapsed, the life policy can no longer be disputed by the insurer against any incorrect or inaccurate information regarding the insured.
A grace period provision is also defined within a life insurance policy that provided for a period of time, usually 30 or 31 days in which an insured must pay a premium payment beyond the date of which the premium is usually due, without losing coverage.
A ‘spendthrift’ provision can be assigned to a life insurance policy to protect the proceeds of a life insurance policy from the beneficiary’s spending habits or any redirection of proceeds directly to any of the beneficiary’s creditors, if so chosen by the insured. Under this clause, the beneficiary cannot receive a lump sum benefit or assign proceeds directly to a creditor, nor can a beneficiary surrender benefits for a present value lump sum. Essentially, this optional clause ensures that the intentions of the insured are properly carried out.
What if both the insured and beneficiary died at the same time, or together in a shared accident? Federal and state insurance laws, as well as specific policy provisions further define how policy proceeds are distributed in the event that a clear solution is not present, or if any laws are broken that might affect the validity of a life insurance policy. These provisions and laws are as follows.
The Uniform Simultaneous Death Act – Enacted in 1940 this act allows a court to decide which individual outlived the other in the event that the insured and primary beneficiary died in the same accident and no proof exists of who lived longer. This act allows the court to decide that the life policy proceeds are paid as if the insured outlived the primary beneficiary and if a secondary beneficiary is named, he or she will receive the death benefit proceeds. If no secondary beneficiary exists, than it is assumed that the insured had outlived the simultaneously deceased primary beneficiary and the death benefit proceeds will be given to the estate of the insured.
Common Disaster Provision – To further define who receives death benefits in the event of the simultaneous or nearly simultaneous death of both the insured and primary beneficiary, a common disaster provision can be included in a life policy by the policyowner. This specifically states a defined period of time that the primary beneficiary must outlive the insured to receive the death benefits and is usually a period of 10 to 30 days after the death of the insured. Most commonly, this provision defines whether the primary or the contingent (secondary) beneficiary is to receive the death benefit in the event that both the insured and primary beneficiary die as a result of a common disaster.
Life insurance policies also included provisions and exclusions to protect the insurer in the event of likely death or illegal activity that might affect a life insurance policy’s proceeds. The following examples are a few common life policy exclusions:
- Suicide is often excluded for the first 2 years a policy is in force. After this time it will usually be covered.
- False pretense or information provided on the application for life insurance with the intent to deceive and defraud the insurer.
- If the policyowner dies as a result of a felonious act, death benefits will not be given to a beneficiary.
- Private aviation (flying a private airplane) is often excluded due to the elevated risk level associated with such profession or hobby. This exclusion normally pertains to private aviation, and not if death occurs during commercial aviation, such as being a passenger on a commercial airline.
- Hazardous occupations or hobbies that are considered dangerous, such as structural metal workers, miners, heavy-equipment operators, stuntmen, race car drivers and other ‘hazardous’ occupations or hobbies are usually excluded from applying for coverage, though employers of these occupations often provide special protection for their employees.
- Being active in the military and dieing during an act of war is often excluded from coverage. Death benefits will not be paid if the policyowner’s death is the result of participation in war. Military officers receive governmental coverage under the rules and regulations of the U.S. military.