By: Boonswang Law Firm

What Happens to the Benefits for a Life Insurance Policy When the Beneficiary Is Deceased?

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Is the life insurance beneficiary deceased? What happens if the life insurance beneficiary dies first?

A busy national life insurance attorney will explain 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.

Life Insurance Beneficiary Deceased or Out-of-Date Beneficiary Designation

What happens when there is no life insurance beneficiary? 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 be paid to another beneficiary or other beneficiaries, or the death benefits will be paid 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 will go 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.

The Death Benefits Will Be Paid to the Insured’s Estate if there are No Beneficiaries Available

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.

1. The Death Benefits Will Be Used to Pay Debts of the Insured’s Estate

If the insured was in debt at the time of death, their estate would be used to pay off any outstanding debts. If their estate includes the death benefit, outstanding debts can eat up all or most of the proceeds.

Contrast this with a named beneficiary receiving the death benefit directly. The beneficiary receives the full amount regardless of the insured’s debts.

Many states exempt a specified amount of life insurance death benefits from being subject to debt or tax collection even after being transferred to the insured’s estate, but this depends on the laws in your state. Call us if you have questions about this.

2. The Death Benefits Will be Subject to Estate Tax

A beneficiary receives the death benefit without being subject to taxation. However, If the sole beneficiary to a life insurance policy dies before the insured and the death benefit is paid to the estate, it will be subject to estate taxes.

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 will govern whether the death benefit is paid out to a second or contingent beneficiary, to the estate of the insured, or to the estate of the beneficiary.

What Happens When the Beneficiary Dies Soon After the Insured Dies?

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 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.

What Happens if the Life Insurance Beneficiary Dies before 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 will be transferred 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. Unlike with the insured’s estate, the aforementioned state-by-state exemptions from debt and tax collection do not apply once the benefit is transferred to the beneficiary’s assets.

What Happens if Beneficiary Designation Invalid due to Automatic Revocation?

In some states, an ex-spouse’s 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 will receive the death benefit, and if there are none, the benefit will be paid to the insured’s estate.

Keep Your Life Insurance Beneficiary Designation 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.

Contact Us if the Named Beneficiary Has Died or the Beneficiary Designation is Invalid

There is much litigation over who is entitled to the death benefit under the circumstances set forth in this article. If you recognized your circumstances in this article and you believe you might be entitled to some or all of 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.