9 Key Rules in Naming and Changing the Beneficiary in Life Insurance Contracts

A beneficiary is a person (or entity) named (or designated such as by a check off) by the policyowner to receive the death benefits under a life insurance policy at the death of the insured. A revocable beneficiary is one whose potential receipt of the proceeds can be cut off, or revoked, at any time by the policyowner. An irrevocable beneficiary is one whose interest in the contract cannot be changed or reduced by the policyowner without his consent of the beneficiary. Such a beneficiary has a vested right to the death benefit as soon as he or she is named irrevocably. Within reasonable limits, the policyowners can change the beneficiaries as often during lifetime as they want—and name anyone else they want as beneficiaries—subject to the procedures specified in the policy and the following limitations:

1. Some states require that the beneficiary have an insurable interest in the insured’s life where the policyowner is someone other than the insured.

2. Community property residents are during their marriages, unable to freely dispose of community assets without the written consent of their spouses. This is because (aside from gifts and inheritances received before or during the marriage) each spouse is deemed to own a one-half, undivided interest in property acquired during the marriage while living in a community property state. If either spouse uses community funds to pay premiums, each spouse has an interest in the policy. So neither spouse can name someone else as beneficiary of the entire proceeds—even a child—without the other spouse’s consent (but can name anyone he or she wants with respect to the policyowner’s one-half interest).

3. State laws frequently limit the class of beneficiaries that policyowners can name where a minor is the insured. Typically, such statutes allow the naming of the insured’s parent, spouse, sibling, or grandparent. A minor, upon reaching the age of legal competency, can change the beneficiary designation at that time. 

4. Many states bar an insured under group term life coverage from naming the employer as beneficiary. 

5. If the policyowner has named an irrevocable beneficiary, the policyowner cannot change the beneficiary without that party’s written consent. An irrevocable beneficiary has a vested right to receive the proceeds of the policy —but contingent on surviving the insured. If the irrevocable beneficiary predeceases the insured, his or her beneficiary rights terminate.

6. Divorce does not, per se, affect the policyowner’s right to change the beneficiary nor does it effect a change of beneficiary in most states. However, in some states, there is automatic termination of a spouse’s interest after divorce while in others the policyowner can change the beneficiary even if it was irrevocable before the divorce. Furthermore, the right to change the beneficiary may be restricted by the divorce decree or property settlement agreement. On the other hand, sometimes at the remarriage of a spouse or upon the legal majority of the children, the policyowner regains the right to change the beneficiary.

7. A legally adjudicated incompetent cannot make or change a policy beneficiary nor can one who is mentally incompetent though not legally declared so. However, the test in the latter case is essentially the same as the test for competency to make a will: Does the policyowner have sufficient capacity to understand the extent of the property (i.e., the amount of the proceeds), the nature of the disposition, and the people who were the natural objects of his bounty? Usually, there is a presumption of competency. The burden of proof of incompetency is placed on the party that alleges the policyowner is incompetent (typically the person who would have been the beneficiary had it not been changed).

8. A beneficiary can collect the proceeds of a life insurance policy if he or she kills the insured in an accident (even though it may involve gross carelessness or manslaughter) or in self defense. But every state bars an intentional and wrongful killer from enrichment because of that act. Typically, once such a person is disqualified, a secondary beneficiary or the insured’s estate will receive the proceeds. (In most situations the issue is not whether the insurer is liable to pay but rather who is the payee. However, if the beneficiary was also the applicant-policyowner and purchased the policy with the express intent of killing the insured, it is likely that the contract is void and the insurer will not be liable to anyone.) Also, the insurer may have no legal liability to make payment to anyone where the insured is legally executed but in a number of states unless the insurer has specifically excluded death by legal execution, the insurer is liable to pay (particularly if the contestable period has passed).

9. A policyowner can, of course, name children as beneficiaries of life insurance but, except for very small amounts, insurers generally will not make settlements directly to minors. This means a guardian would have to be appointed (and suggests to the planner the use of a trust for the benefit of the child (children) to receive the death benefits).

Reproduced with permission.  Copyright The National Underwriter Co. Division of ALM

Leave a Comment