Where do I want the life insurance death benefit to go if I die prematurely? That’s an easy answer for most of us. We want it to go to our spouse. We want him or her to have the money to carry on in the event we are no longer around to provide income and, of course, our retirement investment wisdom.
But what about a contingent beneficiary? What if you and your wife die in a common accident? The law says that if the time of death is determined to be the same or cannot be determined, then the insured is assumed to have survived the primary beneficiary and the proceeds will go to the contingent beneficiary if one is named. If no contingent beneficiary is named the proceeds are added to the estate and are subject to probate. Subject to probate means that a judge will decide where the money should go and this folks is the last thing you want. In this situation you may have wanted to money to go to a relative or a friend who would be the guardians of your children, or in the case of adult children, the executor of those funds for them. If the judge doesn’t see it that way he can subvert all of your wishes and distribute the money directly to the adult children, or order the insurance company to hold the money at interest until your minor children are grown. He may very well distribute it to relatives that you had no intention of leaving anything to. Probate court is famous for bad decisions.
It’s just as bad if there’s an accident and you die at the scene and your wife dies a week later in the hospital. Your life insurance proceeds would go to her, or by the time the claim is processed, her estate, which in the absence of a trust or will leads right back to probate court. What if your (the husband) policy had your wife as the primary beneficiary and your wish was that if your wife was not alive that the death benefit would go to your sister. Conversely your wife had her insurance set up with you as the primary beneficiary with the good intention of having her brother get the money if you weren’t living. If you predecease your wife by even the length of an ambulance ride, the money goes into her estate. When she dies a probate judge could well decide, based upon documentation such as a will, that when your wife dies her estate goes to her brother. In this instance, in the absence of a well written will or trust, your sister may never get the funds that you had told her would be hers.
In the last scenario the naming of a life insurance contingent beneficiary would not have helped because if you die prior to the primary beneficiary, the death benefit goes to the primary beneficiary’s estate if they are deceased. It would only go to the contingent beneficiary if you died simultaneously or if she predeceased you. You can name your spouse as primary beneficiary with the stipulation that if he or she dies within 30 days of your death the proceeds go to the contingent beneficiary. Insurance companies aren’t real crazy about this but they have to honor your request.
So, how do you make sure your wishes are carried out? The first step is to get them out of your head and on paper, legal paper. That can be the naming of a life insurance contingent beneficiary, spelling out your wishes in a legal last will and testament, or having a trust be the beneficiary where the trust spells out all the different scenarios and what is to be done in the event any one of them occurs. Do wills and trusts cost money? Sure they do, but in comparison to probate costs, it’s chicken feed.
So, one thing straight. Don’t go without a contingent beneficiary. If you don’t have anyone in mind, set up a family trust that is allowed to accept life insurance proceeds. It doesn’t have to be an ILIT, irrevocable life insurance trust, but it does need to be set up by an attorney so it can be the contingent beneficiary.
Don’t make the mistake of having your contingent beneficiary be “all living children equally”. This is inviting all of the skeletons out of the closet. Name your life insurance contingent beneficiaries and insist that their birth date and SSN is part of the declaration. If you get divorced, call your agent and ask them what your options are for designating a new primary beneficiary. Also remember to review your beneficiaries at least once a year to make sure they are still on track with your wishes. Your agent should remind you to do this if he has ever called since selling you your policy.
Bottom line. When you see life insurance work the way it is supposed to you understand why letting it get messed up is such a disaster. While there is no replacing a lost loved one, the relief that is brought by knowing that they took care of things is priceless. Don’t let that money end up in the hands of a judge who doesn’t know you or your family. Consider beneficiary designations carefully. If you have any questions or need to review your beneficiary designations, call or email me directly. Let’s talk.