Planners should therefore take special care in the following beneficiary situations:
1. The policyowner’s spouse is specifically named – Courts look to the person’s name rather than description as husband or wife or fiancée. So even if that person is no longer a husband, wife, or fiancée when the insured dies, absent specific state law to the contrary, the proceeds will still be payable to the named person.
Courts do not pass on the morality of its citizens and recognize the right of the policyowner to make any beneficiary designation he or she pleases.
2. The policyowner merely says, “To my husband” or “To my wife” but does not name the person – Here, proceeds are payable to the person who, at the time of the insured’s death, meets that description.
3. The policyowner names each child individually and describes the relationship – This is the clearest and safest approach. But a child born after the beneficiary form is signed may be excluded.
4. The policyowner names his children as a class rather than naming them individually – The insurer may have difficulty in verifying who is included in the class—especially if name changes have occurred. The term “my children” may also cause legal problems and in many cases will include illegitimate, legally adopted, and children from a prior marriage as well as children born after the beneficiary form is signed and even those born after the insured’s death. The term “lawful children” will disqualify illegitimate children.
5. The policyowner names “My Issue and Heirs” – “Issue” is a term far broader than children and includes any lineal descendant no matter how far down the line. So grandchildren and even great-grandchildren would be included. Heirs means those who would inherit under state intestacy laws (i.e., in the absence of a valid will). This designation is not generally recommended.
6. The policyowner names a class of beneficiaries per capita or per stirpes – A per capita (by the heads) distribution means that the proceeds will be split according to the number of beneficiaries in the class. If there are three children, each takes one-third. If there are only two out of the three that survive the insured, each takes one-half. A per stirpes (by the branches) distribution means that the distribution is first divided among the class—including a share for any predeceased member that is then split among that member’s children. If two out of three children survive, the proceeds are split three ways with the deceased child’s children equally splitting the share the deceased child would have had.4 The choice between per capita and per stirpes is personal but often causes confusion. The authors recommend the policyowner’s intent be specified with an example.
7. The policyowner names a minor as beneficiary – Few states would allow payment of policy proceeds to a minor and few companies would agree to do so even if not forbidden by law because minors cannot give a valid release to the insurer. For this reason, policyowners should name a trustee as beneficiary in most cases involving minors.
8. The policyowner names a trust as beneficiary – This designation provides the ultimate in flexibility, by assuring that the trustee will survive the insured and spouse, and increasing the chances of proper investment management and higher returns.
9. The policyowner names a corporation, partnership, limited liability company, or charity – It is essential that the full legal name of the entity be specified.
10. The policyholder names himself – This is common and proper practice where one party owns life insurance on the life of another. In fact, there are almost always income or gift tax problems where one party owns insurance on the life of another but makes a third party the beneficiary. We call this the “Unholy Trinity.”
11. The policyowner has failed to name a beneficiary – Some smaller policies and group term life contracts provide a facility of payment clause that enables the insurer to pay a limited amount directly to the providers of the insured’s last illness and burial expenses. Insurers will pay most larger amounts according to the policy provisions that specify the recipient when no beneficiary has been designated (or where all primary and contingent beneficiaries predecease the insured).
Selecting a beneficiary by default is obviously not the preferable manner for disposing of policy proceeds.
Reproduced with permission. Copyright The National Underwriter Co. Division of ALM