When the primary beneficiary of a life insurance policy dies before the insured person, the subsequent recipient of the policy’s payout is determined by the presence of contingent beneficiaries. If the primary beneficiary is deceased, the payout is divided among any contingent beneficiaries specified at the policy’s inception.
In the absence of contingent beneficiaries, the death benefit is likely to be directed to your estate, subjecting it to probate proceedings where it becomes vulnerable to public scrutiny and potential creditor claims.
Should the death benefit enter probate, creditors, including the IRS and other financial institutions, may stake a claim on the estate to recover outstanding debts like taxes, mortgages, or loans. Without proper beneficiary designations, there is a risk of prolonged legal battles among friends, family, or business associates seeking a share of the estate, potentially leading to unintended recipients inheriting the funds.
To safeguard against such scenarios, financial advisors and insurance experts strongly advise naming at least one contingent beneficiary, and in some cases, even a tertiary beneficiary. This proactive measure can help prevent disputes and litigation and ensure that your assets are distributed according to your wishes without unnecessary delays or complications.
What Occurs if One of Several Life Insurance Beneficiaries Dies?
If one of the multiple beneficiaries designated in a life insurance policy passes away, the distribution of the death benefit among the remaining beneficiaries is contingent on the specific terms of the policy.
In cases where there are more than one primary beneficiary, or if the primary beneficiary is deceased and there are multiple contingent beneficiaries and one of them is no longer alive, the remaining beneficiaries typically share the proceeds.
The method of redistribution can follow either per stripes or per capita approach. For instance, if you have named your spouse and sibling or children as co-primary beneficiaries, each entitled to half of the death benefit, and one beneficiary is deceased, the surviving beneficiary would receive the entire benefit.
Alternatively, if you have three primary beneficiaries, each designated to receive a third of the death benefit, and one beneficiary has passed away, the remaining two beneficiaries would split the benefit equally.
To ensure that your assets are distributed according to your preferences and are not subject to default redistribution rules, it is essential to proactively plan and specify your desired distribution method in advance within your policy documentation. This proactive step can help guarantee that your wishes are carried out precisely as intended in the event of beneficiary changes or unforeseen circumstances.
What Happens if the Designated Beneficiary is an Organization that is no Longer in Existence?
If the designated beneficiary of your life insurance policy is an organization that no longer exists at the time of your passing, several potential outcomes may unfold. Firstly, the death benefit could be directed to your estate, subjecting it to probate proceedings as previously outlined. Alternatively, a successor organization that has assumed the responsibilities of the defunct entity you originally named as the beneficiary might come forward to assert a claim on the funds.
For instance, consider a scenario where you designate your alma mater, the college you graduated from, as the beneficiary of your policy. If that college undergoes financial challenges leading to its dissolution and integration into a larger neighboring university, the successor institution may lay claim to the policy proceeds. This claim could be based on their assumption of the defunct college’s assets and ongoing operations involving students, faculty, and property.
How to Update Your Life Insurance Beneficiaries
Updating your life insurance beneficiaries is a crucial task to ensure your intended recipients receive the death benefit according to your wishes. Here are steps you can take to manage your beneficiaries effectively:
• Name a contingent beneficiary
Including one or more contingent beneficiaries in your policy is a proactive measure to prepare for the scenario where a primary beneficiary passes away before the distribution of the death benefit. Contingent beneficiaries help prevent the benefit from reverting to your estate.
• Designate proportions clearly
If you have multiple beneficiaries and wish to allocate the death benefit unequally, specify the exact percentages each beneficiary should receive in your policy. A clear designation helps avoid potential disputes during the settlement process.
• Update the policy regularly
Life changes such as marriage, starting a family, or the loss of a spouse necessitate updating your life insurance policy. Ensure your beneficiaries’ current contact information is on record. For minor beneficiaries, consider establishing a revocable trust to hold the funds until they reach adulthood.
• Keep beneficiaries informed
Inform your beneficiaries about their inclusion in your life insurance policy. They will need to file a claim with the insurer after your passing, providing the necessary documentation. Sharing details about the policy and the insurer will facilitate a smooth claims process and prevent delays in accessing the death benefit.
Per Stirpes vs. Per Capita Distribution
The allocation of your death benefit can follow either a per stirpes or per capita approach. Per stirpes entails dividing the funds equally among descendants if the primary beneficiary passes away. For instance, if the benefit is to be shared between two children but one predeceases you, the surviving child receives their designated portion while the deceased child’s share is divided equally among their offspring.
Conversely, in a per capita distribution, the death benefit is directed solely to the remaining primary beneficiary.
| Per stripes | Per capita |
| Uses a generational distribution method | Distributes the wealth equally among the beneficiaries |
| The assets remain within the family | Assets can be given to individuals who aren’t part of the family |
| It takes away the need to update policy following major live events | The policy needs to be adjusted |
The table above helps you understand what distinguishes per stripes from per capita, helping you make an informed decision.
FAQs
Who gets life insurance if the beneficiary dies?
If the primary beneficiary dies before the policyholder, the death benefit may go to any contingent beneficiaries named in the policy. In the absence of contingent beneficiaries, the benefit could be paid into the insured’s estate and go through probate.
What happens if my life insurance beneficiary dies before or at the same time I do?
If your beneficiary dies before you, the death benefit distribution will depend on the policy terms. Typically, if the primary beneficiary passes away, the benefit may go to any contingent beneficiaries named in the policy. If both the primary and contingent beneficiaries are deceased, the benefit could be absorbed into the estate, potentially facing taxation and debt collection.
What happens if a policyholder dies before the insured?
If the policyholder dies before the insured, the death benefit will be paid out when the insured individual passes away, not necessarily when the owner does. The benefit may go to the named beneficiaries or the insured’s estate, depending on the policy terms.
