Executive summary
- When you file for your life insurance policy, you can designate a primary beneficiary and contingent beneficiary to receive your assets.
- After a policyholder passes away, you can only contest a life insurance beneficiary under certain circumstances and through a complex legal process.
- To minimize disputes, it’s wise to regularly update your beneficiaries, name contingent beneficiaries, and communicate any changes with your loved ones.
- If you have questions about who receives life insurance proceeds, you can contact a probate and estate administration attorney for support.
Glossary
Decedent – An individual who has died, leaving behind estate assets, like a life insurance policy, to be distributed to beneficiaries, according to his/her wishes.
Primary beneficiary – The person, or group of people, who is first in line to receive the proceeds from a life insurance policy upon the policyholder’s death.
Contingent beneficiary – The person, or group of people, who is next in line to receive the proceeds from a life insurance policy if the primary beneficiary or beneficiaries have passed away.
Irrevocable beneficiaries – Beneficiaries of a life insurance policy that, once they are named, can only be removed with consent from the beneficiary.
Probate – The process in which a will is validated by the court and the assets of an estate are administered through a court in accordance with the wishes of the will.
Introduction
When you purchase life insurance, you may designate a beneficiary to receive the proceeds upon your death. The person you designate as a beneficiary will receive the full funds from your policy.
You can name a single beneficiary if you choose to do so. However, it is advisable to name both a primary beneficiary and one or more contingent beneficiaries. This ensures that if the primary beneficiary passes away before you, or at the same time as you, the policy proceeds will still be directed to someone you choose.
It’s important to note that life insurance proceeds are not disposed of through a will. Rather, life insurance is a legally binding contract between the policy owner and the life insurance company. The contract requires the insurance company to pay the proceeds to the named or default beneficiary upon the policy owner’s death, and, absent a court order to do otherwise, it must follow the terms of the contract regardless of what the policy owner’s will says.
Understanding how life insurance policies work will help you avoid life insurance beneficiary disputes, know how to navigate your legal obligations, and ensure that the funds from the policy reach your intended beneficiaries.
How to designate beneficiaries
There can be considerable nuance that goes into designating beneficiaries depending on the case. When designating beneficiaries, it’s helpful to keep the following in mind to ensure that your proceeds are distributed as you intend.
Who can be a beneficiary?
Almost anyone can be named as a beneficiary depending on who you prefer to receive your proceeds upon your death. This can include your children, your spouse, a family member, a trust, or an estate.
However, state laws will also play a factor and there may be some restrictions on who can be a beneficiary depending on where you are located. You should take the following exceptions into account:
- A minor child can be considered a beneficiary of a policy, but some states may restrict that the child cannot receive the full distribution until they turn 18. In this case, the funds would be held by the child’s legal guardian.
- If you live in a community property state, like California or Texas, then you must designate at least 50% of your proceeds to your spouse.
- If you name an irrevocable beneficiary, this person cannot be easily changed or removed unless they consent, so you will have difficulty changing it during your lifetime, but it will be nearly impossible to contest upon your death.
Keep in mind that you do not only have to name one beneficiary. In fact, naming multiple beneficiaries can protect your distributions and ensure that an intended party receives the proceeds from your policy without any conflict. If you choose multiple beneficiaries, you can also designate what percentage each party will receive as long as it totals out to 100%.
Primary beneficiaries vs. Contingent beneficiaries
There are two types of beneficiaries—primary and contingent. A primary beneficiary is the person, or people, who is first in line to receive the proceeds from your life insurance policy upon your death.
Meanwhile, a contingent beneficiary is the person who is second in line to receive the proceeds in the event that the primary beneficiary has passed away.
If the primary beneficiary dies at the same time as you or before the policy is distributed, then the proceeds will be distributed to your contingent beneficiary or beneficiaries. Naming a contingent beneficiary also relieves the burden of having to continuously update your policy if something changes.
For example, if something happens to the primary beneficiary, you can rest assured that your policy proceeds will still be distributed to the contingent beneficiaries in alignment with your wishes.
Common pitfalls in naming beneficiaries
You can avoid conflict around the distribution of your life insurance proceeds upon your death by being sure to avoid a few common mistakes.
The most common mistakes in naming beneficiaries include:
- Not updating your policy – One of the most common mistakes surrounding life insurance policies is not updating your policy if circumstances change. Forgetting to update your beneficiaries can result in disputes if there is disagreement amongst your descendants surrounding who should receive the death benefit.
- Naming only one beneficiary – If something happens to the primary beneficiary before you die or before the policy can be paid out, then it can leave your policy’s proceeds in limbo.
- Establishing an irrevocable designation – Naming an irrevocable beneficiary can be a good way to protect your assets, but this designation cannot be easily changed without the beneficiary’s consent, so it’s important to consider all possible contingencies before doing so.
There can be a lot of nuance involved when naming beneficiaries for a life insurance policy. Consulting with a financial advisor or estate planning attorney can help you navigate these complexities and ensure your wishes are properly documented.
Life insurance as a contract
Although life insurance is often considered as part of the assets that one leaves behind upon their death, it’s governed by a contract, not a will. This means that the insurance company is contractually obligated to distribute the proceeds from the policy as outlined by the agreed upon terms.
Because of this, it’s difficult to dispute or make changes to a policy after the policyholder has passed—the insurance company is unable to make changes to an established contract. If there are challenges surrounding the listed beneficiary after the policyholder’s death, the court will often need to intervene to resolve them.
Is life insurance part of an estate?
Typically, life insurance is considered separate from the estate, as the proceeds generally go to a single beneficiary or a group of beneficiaries rather than get grouped in with estate assets. However, there are exceptions to this and the proceeds can be tied to an estate instead of a single beneficiary in some instances.
Life insurance proceeds will be considered part of an estate in the following circumstances:
- No named beneficiary – If a policyholder does not name a beneficiary for their life insurance policy, the proceeds will be included as part of the estate.
- The estate is listed as a beneficiary – If the policyholder names their estate as the beneficiary, then the proceeds will be included in the estate assets and considered part of the estate.
- All beneficiaries have passed – If all named beneficiaries have passed away before the policyholder, and there are no contingent beneficiaries, the proceeds will be grouped into the estate.
Does life insurance go through probate?
Generally, life insurance proceeds are able to bypass probate. When there is a named beneficiary or beneficiaries, the proceeds will typically go straight to the appropriate parties, as life insurance policies are separate from the assets outlined in a will. This allows life insurance proceeds to be distributed to the intended beneficiaries quickly upon the death of the insured instead of being held up in probate court. That said, there are exceptions that will result in the proceeds being considered part of the estate.
For example, if a decedent designates an estate as a beneficiary, then the proceeds from the life insurance policy will be pooled into the total assets of the estate. Similarly, if there is no listed beneficiary, or all the beneficiaries have passed, then the proceeds from the policy will pass through probate to determine how to distribute them to your heirs. In this case, the policy proceeds will be included in the total estate assets to be portioned to named beneficiaries based upon the terms of the will.
If there is no will established and no listed beneficiary, the life insurance proceeds will have to pass through the process of intestate succession with all other assets. This is the process where assets are distributed to entitled beneficiaries by the courts according to state intestacy law.
If conflicts arise around life insurance proceeds and who has a right to them, a probate lawyer can be a valuable resource in helping you understand your rights, the potential legal options and how to distribute the assets accordingly.
What do you need to prove who is entitled to life insurance proceeds?
The insurance company will not automatically pay life insurance proceeds when the policy owner dies. Instead, the beneficiary must file a claim to receive the insurance proceeds. The exact process and requirements will vary between insurers. For instance, some insurance companies allow claims to be submitted online, while others require a written claim to be sent by U.S. mail.
The evidence that you need to prove you are entitled to life insurance proceeds will depend on the terms of the life insurance policy. However, most policies require you to submit a claim form, a copy of the policy, and a certified copy of the death certificate. If the death occurred outside the United States, trustworthy or reliable proof of death may be required.
How do you contest a life insurance policy payout?
If you believe that life insurance policy proceeds should not go to the named beneficiary, you cannot challenge the payout with the insurance company. Since the insurance company is required to honor the terms of the contract, you will need to contest a life insurance policy payout in court.
Grounds For Contesting a Payout
However, you can’t contest a life insurance policy payout simply because you don’t like who was named as the beneficiary. Instead, you need a legally recognized reason to challenge the designation.
Some common situations where life insurance beneficiaries are contested include:
- The insured never updated their life insurance policy’s beneficiary after a divorce, and a former spouse is named as the beneficiary.
- The insured attempted to change their beneficiary but could not complete the act.
- The insured lacked the mental capacity to name a beneficiary.
- The designation was made due to fraud, undue influence, or coercion.
- The destination conflicts with community property laws, a court order, or a divorce decree.
- The designation form was improperly executed.
- The beneficiary is disqualified because they caused the insured’s death.
How to contest a payout
If you believe the beneficiary designation should be considered invalid and have standing under any of the grounds listed above, you can navigate the court system by contesting a payout to seek a more favorable outcome.
To contest a pay out, you should take the following steps:
- Contact the insurance company with a notice of contest. When they receive this, they’ll wait for the situation to be settled before paying out the death benefit.
- To ensure that your case will maintain legitimacy in court, you should begin the process by gathering evidence surrounding your reasoning. For example, if the policyholder lacked mental capacity when naming a beneficiary, you may compile medical records to prove this.
- Negotiate with the policy beneficiary to pursue a resolution that satisfies all sides.
- If negotiations don’t bring forward a resolution, then you will need to file a case with the court and attend a hearing, presenting your evidence for why the beneficiary may be unjustified.
- The court will then decide whether the contest is valid or if the beneficiary in question should receive the payout.
Contesting a life insurance policy payout can be a complex and lengthy process, sometimes taking months or even years to resolve. If you plan on contesting a payout, you should contact a skilled probate and estate administration attorney for support in navigating the legal system and ensuring you take all the necessary steps for a successful contest.
Where can you file a life insurance lawsuit?
If you want to contest a beneficiary designation, you can file a life insurance lawsuit in the probate court handling the policy owner’s estate. If a probate case has not yet been opened, you may be able to initiate a case yourself in federal or state court depending on jurisdictional facts.
Beneficiary designation contests are challenging to win and legally complex, so it’s vital that you consult with an experienced probate litigation attorney before taking any action. A knowledgeable lawyer can make recommendations as to whether you have legal grounds to challenge a life insurance payout and what the most effective course of action to address your concerns might be.
Additional insights
Remember that, ultimately, life insurance proceeds and payouts depend on state law. If a state has specific laws, then a policyholder must follow them as they designate the beneficiary. Typically, states will yield to the policyholder’s wishes to name whoever they want as the beneficiary. However, there are some instances where there is a legal obligation for the policyholder to benefit specific individuals, like a spouse.
For example, California and Texas are both community property states, where any assets that belong to one spouse are considered to belong equally to the other spouse. In these states, the surviving spouse has a legal right to 50% of the decedent’s assets.
If the premiums are paid for with joint marital assets, like a joint bank account, life insurance policies are considered part of community property. In these cases, the spouse has the legal right to claim half of the insurance payout upon the policyholder’s death if not already included as a beneficiary. However, this varies by state, as not all states are community property states, and in others, the surviving spouse can only claim an “equitable” portion of the distribution or has no obligation at all.
Other factors may impact the requirements for a life insurance policy payout, like if a policyholder must ensure their policy provides benefits for an ex-spouse due to spousal support or child support agreements. If you have any questions about establishing your life insurance policy or the legal obligations you have in the process, contact a probate and estate administration attorney.
Find a probate and estate administration attorney for support
When you designate a beneficiary for a life insurance policy, that person or entity will receive the proceeds. Potential disputes can arise around life insurance proceeds when interested parties have concerns around the named beneficiaries or the decedent’s intent. If these disputes do occur, it’s crucial to have the support of a skilled attorney by your side to navigate any legal proceedings.
At RMO Lawyers, we are well-versed in estate planning issues, and we understand what’s necessary to ensure the wishes of the decedent are upheld. Our probate and estate administration attorneys will help you understand the options available to you, navigate the legal process and develop a winning strategy to secure your rightful inheritance.
Schedule a consultation with our team to learn more about how we can ensure the best outcome for your estate.
