National life insurance law firm, Boonswang Law, explains what happens if the beneficiary of a life insurance policy is deceased, dies soon after or at the same time as the insured, dies while the claim is under review, or if the beneficiary designation is otherwise invalid.
If a close friend or loved one has died and the named beneficiary of their insurance policy has also died, give us a call. You may be entitled to some or all of the death benefit if you are a secondary beneficiary, a contingent beneficiary, or an heir to the estate of the insured.
Out-of-Date or Deceased Life Insurance Beneficiary Designation
If the primary beneficiary of death benefits is deceased or the beneficiary designation is otherwise invalid, there are two possible outcomes: the death benefits will pay out to another beneficiary or other beneficiaries, or the death benefits will pay to the insured’s estate.
Did the Insured Name Multiple Life Insurance Beneficiaries?
Generally, if there are multiple primary beneficiaries and one dies, the death benefit passes to the remaining living beneficiaries. If the primary beneficiary of a policy is deceased, invalid, or cannot be found, the death benefit goes to a named secondary beneficiary or contingent beneficiary. If there are multiple “co-beneficiaries” on a policy and one of them has passed away, the death benefit will be split among the remaining co-beneficiaries.
What Happens When One of Multiple Life Insurance Beneficiaries Dies Before the Policyholder?
The policyholder has options when naming multiple primary beneficiaries. They can have the beneficiaries share equally in the death benefit, or they can designate a percentage to each beneficiary.
In either case, if one of the primary beneficiaries dies before the policyholder, their portion of the death benefit will either be distributed to the remaining beneficiaries, or can pass to a contingent beneficiary depending upon what the policyholder specified.
What Happens to Life Insurance with No Beneficiary
What if both the primary and secondary beneficiary on a policy are deceased or both designations are invalid? In these cases, the life insurance proceeds are paid to the insured’s estate, which consists of all of their assets and debts upon death.
This may seem fine at first glance because the estate is usually transferred to the deceased’s next of kin by default. However, paying the death benefit to the insured’s estate can be disadvantageous for two reasons.
Death Benefits Pay the Debts of the Insured’s Estate
If the life insurance death benefits pay to the insured’s estate, they are subject to the claims of the insured’s creditors and pay the insured’s debts. This is not the case if the death benefits pay directly to a beneficiary.
Death Benefits are Subject to Estate Tax
If the insured’s estate is of a certain size, under state and federal law it may be subject to estate tax that is paid before the estate settles and the insured’s heirs receive anything. No tax is due when the death benefits pay directly to a life insurance beneficiary.
Why You Don’t Want Your Death Benefit to Go to Your Estate
Keep your beneficiary designations up to date to avoid losing money and time processing the death benefit through your estate. You want the life insurance coverage you have been paying for to provide a payout directly to your beneficiaries, not pay your creditors and the government first.
What Happens in Cases of Simultaneous Death?
“Simultaneous death” is the term used to refer to instances when the beneficiary dies at the same time as the insured or within 24 hours of the insured’s death.
In cases of simultaneous death, state law governs whether the death benefit pays out to a second or contingent beneficiary, to the estate of the insured, or to the estate of the beneficiary. These cases are often the subject of extensive investigation and also litigation, if parties dispute who gets the death benefit.
When the Beneficiary Dies Soon After the Insured
Spouses often name each other as beneficiary to their life insurance policies, or one spouse is the beneficiary of the other spouse’s policy. This becomes problematic if a spouse suffers from “broken-heart syndrome” and passes away a month to two after the other, or when a couple is in a fatal accident together and one dies a week or two after the other.
In either case, the policy pays out to the beneficiary’s estate, is used to pay debts of the estate and perhaps estate tax, and the remainder is distributed to the heirs of the estate. Check with the law in your state, as each state treats this issue differently and there may be additional nuances.
If the Beneficiary Dies Before the Claim is Approved
If a policy’s primary beneficiary is alive at the time of the insured’s death but dies before the claim is processed or paid, the death benefit transfers to the beneficiary’s estate rather than the insured’s. This opens the door to the possibility of the death benefit being absorbed by the beneficiary’s outstanding debts or being subject to estate taxes.
Automatic Revocation & Invalidating the Primary Beneficiary
In some states, an ex-spouse’s life insurance beneficiary designation is “automatically revoked” upon divorce. If the beneficiary designation is invalid due to divorce and automatic revocation, then a secondary or contingent beneficiary receives the death benefit. If there are none, the benefit pays to the insured’s estate.
What Happens if the Contingent Beneficiary Dies
Life insurance death benefits pay to primary beneficiaries first. If a contingent beneficiary dies before the insured, that has no effect upon who gets the payout. However, the insured would be wise to update their beneficiary designations to reflect a replacement.
Keep Your Life Insurance Beneficiary Designation(s) Current
The big takeaway is that it is imperative to keep beneficiary designations as up-to-date as possible. Don’t be left wondering what happens if your beneficiary dies before you or if your beneficiary is out-of-date or otherwise invalid.
You also need to name more than one beneficiary. Life insurance is usually advertised as a “safe” investment, free from taxes and unforeseen deductions. However, if your beneficiary is deceased or cannot be located, or your beneficiary designation is invalid, the death benefit may be treated the same as any other asset and consequently be subject to debt and tax collection.
Designating multiple primary beneficiaries, a secondary beneficiary, or a contingent beneficiary or beneficiaries provides an effective safeguard against the death benefits paying out your estate.
Talk with an Experienced Life Insurance Lawyer
There is much litigation over who is entitled to the death benefit under the circumstances of a life insurance beneficiary predeceasing a policyholder, and beneficiary disputes are common.
If you recognized your circumstances in this article and you believe you might be entitled to some or all the death benefit, or if your life insurance claim was denied, call us for help. We don’t get paid unless and until you do, and your initial case evaluation is free of charge.
