How to Name Multiple Beneficiaries in your Life Insurance Policy

A policyowner can—and should—name more than one beneficiary. A planner is derelict in duty if the policyowner is not told of the privilege and advantages of naming both a primary beneficiary (which can be more than one person or entity) and one or more contingent or secondary beneficiaries. Throughout this book are numerous examples of tax savings and creditor protection available through properly arranged life insurance. The authors have found few instances where allowing the policyowner’s estate to dispose of insurance proceeds (by default in not naming a contingent beneficiary) is advantageous in comparison to shifting wealth directly through the insurance contract.

The primary beneficiary is the first person (or class of persons) in line to receive the proceeds when the insured dies. But to be entitled to the proceeds, the primary beneficiary must be living on the date the insured dies. Otherwise, the insurer pays the proceeds to the class of beneficiary whose interest is contingent upon surviving both the insured and the primary beneficiary. This class is appropriately called the contingent beneficiary.

The policyowner may name more than one individual, entity, or combination of individuals and entities in each beneficiary class. For example, a policyholder may name his spouse if living and otherwise his two children. Where more than one beneficiary is in a given class, they typically share the proceeds equally unless the policyowner specifies otherwise in the beneficiary designation. Policyowners can (and in the opinion of the authors, should) even name the third level of beneficiaries or final beneficiaries in case all beneficiaries in a higher class have predeceased the insured. Often, parents, nieces, nephews, cousins, or a charity such as a church, synagogue, or university are named at this level. Alternatively, the policyowner can designate the estate of the insured and the proceeds will become part of the probate assets where the insured’s will (or, if no will exists, the state’s intestate laws) determines the disposition.

Usually, a lower class’ rights are extinguished if the policy makes payments to members of a higher class. For instance, a contingent beneficiary will receive nothing if the primary beneficiary is alive when the insured dies. Likewise, the final beneficiary has no expectancy of a share of the proceeds if the contingent beneficiary survives the insured and the primary beneficiary predeceased the insured. Even if proceeds are taken in installments, once they are payable to a higher class of beneficiaries, any remainder payable at the death of a member of that higher class will be payable to the decedent’s estate (or contingent payee) rather than to the next class of beneficiary.

Even where it seems inherently unfair, the insurer is almost always held by the courts to be bound to pay the proceeds to the named beneficiary. There are numerous cases where the proceeds were payable to a spouse long divorced by the insured because the policyowner had forgotten to designate a new beneficiary.

Specificity is essential. The beneficiary designation should describe the person with sufficient clarity and certainty so that the insurer can easily identify the proper person, make payment, and obtain a valid release.

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

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