Life Insurance Beneficiary
When a loved one passes away leaving life insurance, there can be dire and unexpected consequences if no beneficiary is designated to receive the proceeds. This situation can be easily avoided whilst the policy owner is still alive. However, once the insured dies, the distributions are set according to applicable laws.
Who can be the life insurance beneficiary?
The insured can name one or more persons to receive the proceeds equally or in proportions stated by the policy owner. When the intended recipient is a minor, a trust should be created and designated to receive the funds.
The policy owner can also name his or her estate as the beneficiary, although this is not advisable. The benefit of life insurance proceeds is that the funds bypass the requirement of probate. They are distributed regardless of the will and therefore also are not subject to state inheritance taxes. Insurance death benefits are not held up in probate, aren’t subject to contestability and therefore are not dwindled away with court and attorney fees.
It is more prudent to name specific beneficiaries rather than leaving the funds to go through your estate.
How can there be no life insurance beneficiary?
Most life insurance policies and companies require the policy owner to stipulate a beneficiary or beneficiaries, limiting the possibility of having no heir being named.
If someone has been named in a policy, the insurance policy can still be left with no beneficiary if that named person passes away before the insured. To avoid this occurrence, the insured can nominate another person to take that person’s share in the event of his or her death.
To the surprise and perhaps detriment of some, a select few policies including FEGLI, leave the burden to the policy owner to name a beneficiary. The owner is not required to but SHOULD complete and send the Designation of Beneficiary Form to the relevant department or office. If the owner hasn’t done this, the proceeds are paid in in accordance with FEGLI law.
What happens if there is no life insurance beneficiary?
Unless it’s a FEGLI policy, if there is no receiver named or the person has died before the insured, in most states the insurance proceeds form part of the decedent’s estate. This means that the funds will be dealt with as if they were part of the decedent’s other assets.
If the decedent has a will, then the insurance funds will be distributed in accordance with the will as if they formed part of the residual assets. The executor of the will is required to pay out the funds as stipulated in the will. If the will is contested, then the insurance proceeds will be held on trust along with the other assets, pending the result of any private settlement or court hearing.
What if there is no will?
If the decedent did not leave a valid will, the insurance funds will be dealt with the intestate provisions of state probate or succession law, along with all other assets left by the decedent. Probate law varies from state to state, but generally, someone will need to apply for probate. The court will usually choose a relative or the decedent’s attorney as the executor to carry out the court’s orders.
First, all debts and costs are paid to creditors, the attorney and the court. The court will determine how the remainder is distributed. Generally, if there are no children, the spouse will receive the lot. If there are children, the assets are divided among the spouse and the children in proportions that depend on the number of children. However, the intestate distributions vary from state to state.
For example, chapter 11 Part 2 of the California Probate Code states:
“6400. Any part of the estate of a decedent not effectively disposed
of by will passes to the decedent’s heirs as prescribed in this
part….
6401.(c) As to separate property, the intestate share of the surviving
spouse or surviving domestic partner, as defined in subdivision (b)
of Section 37, is as follows:
(1) The entire intestate estate if the decedent did not leave any
surviving issue, parent, brother, sister, or issue of a deceased
brother or sister.
(2) One-half of the intestate estate in the following cases:
(A) Where the decedent leaves only one child or the issue of one
deceased child.
(B) Where the decedent leaves no issue but leaves a parent or
parents or their issue or the issue of either of them.
(3) One-third of the intestate estate in the following cases:
(A) Where the decedent leaves more than one child.
(B) Where the decedent leaves one child and the issue of one or
more deceased children.
(C) Where the decedent leaves issue of two or more deceased
children.”
What about FEGLI?
FEGLI stands for Federal Employee’s Group Life Insurance. As stated above, these policies leave the onus on employees to nominate beneficiaries. If the decedent failed to make a designation, the order of payment or precedence is determined under FEGLI law. The life policy proceeds will NOT initially form part of the decedent’s estate.
If there is no named beneficiary, the law relating to FEGLI stipulates the proceeds to be paid to the spouse. If there is no surviving spouse, it will be distributed equally among the decedent’s children and if a child has predeceased, then that child’s children. Many websites simply refer to FEGLI law or the FEGLI Act. The provision is actually contained in the U.S. Code, Title 5, Part III, Subpart G, Chapter 87, Section 8705, which states:
“(a) Except as provided in subsection (e), the amount of group life insurance and group accidental death insurance in force on an employee at the date of his death shall be paid, on the establishment of a valid claim, to the person or persons surviving at the date of his death, in the following order of precedence:
First, to the beneficiary or beneficiaries designated by the employee ….
Second, if there is no designated beneficiary, to the widow or widower of the employee.
Third, if none of the above, to the child or children of the employee and descendants of deceased children by representation.
Fourth, if none of the above, to the parents of the employee or the survivor of them.
Fifth, if none of the above, to the duly appointed executor or administrator of the estate of the employee.
Sixth, if none of the above, to other next of kin of the employee entitled under the laws of the domicile of the employee at the date of his death.”
The word “employee” is defined in s2105 of that Act.
With any life insurance policy, be it group, individual, term, cash value or otherwise, you MUST ensure to designate a beneficiary. This is the only way to make sure those proceeds actually go to the persons you intended to receive them. It’s surprising how many people fail to do this simple task which can have totally unexpected and undesirable consequences.