Sometimes there’s a wrinkle in your life insurance policy: what if you die, but the life insurance beneficiary also dies? What happens to all of that money? What are the life insurance beneficiary rules to sort this out?
It’s a very real situation. Think back to the 2015 case of George Bell. The New York Times highlighted the aftermath of his lonely death and the complications that arose from him not having an up-to-date legacy plan. His had a life insurance policy dating back to 1982 which listed his parents – both of whom had passed away – and his will listed people with whom he’d fallen out of touch.
Life insurance is typically pretty straightforward: you pay for a policy, and if you die while that policy is still in force, the death benefit goes to your named beneficiary. After all, that’s the whole point of life insurance. Simple, right?
But it's important to review your insurance policies and will regularly, because depending on who's your primary beneficiary, who's your contingent beneficiary, and what happens if they die, you may have to make changes.
Scenario #1: Your beneficiary dies before you do
Let’s say you name Jane as your beneficiary. You’re still alive – yay! – but sadly Jane has passed on (and hopefully got a life insurance quote of her own).
So what does that mean for you?
It means that you should update your policy so that Jane is no longer a beneficiary. If you don’t, the death benefit for your policy will go to your estate. Your estate is essentially everything that you owned: property, possessions, investments, and so on. Your death benefit will be added to the sum value of this collection.
That’s not the worst thing in the world, but it may be tied up for a lot longer than if it was simply paid out to a beneficiary, as it’ll be included with other assets in your will and needed to be dealt with accordingly. Even worse, if you don’t have a will that outlines what happens with your assets, the state gets involved and the process can get dragged out even longer.
Scenario #2: You die first, but your beneficiary dies before the death benefit is paid
Sadly you don’t make it out alive in this scenario, but the good news is that your life insurance policy did what it was supposed to and will be paid out to your beneficiary – let’s say Jane again. Unfortunately, though, Jane dies before she actually gets the money.
In this case, the death benefit would go to Jane’s estate rather than yours. That means, as with the first case, it has to go through the whole process of being doled out according to her will (or, again, dealt with by the state).
Scenario #3: You named multiple beneficiaries, and one is dead
You’re pretty generous, so you have multiple primary beneficiaries: Jane, Don, Mike, and Kate, each getting 25% of your death benefit. Don dies before you do; the death benefit is then split equally among the remaining beneficiaries.
In most cases, death benefit distribution will work itself out by going to the next appropriate party, whether it’s an estate or another beneficiary. But it’s always possible you don’t want it going to that next appropriate party! Here are some things you can do to control where your benefit goes:
Know if you live in a community property state. Let’s say you don’t name your spouse as your beneficiary. We won’t judge. But if you live in a community property state, both spouses have an equal stake in earnings and property during the marriage – including life insurance. That means your beneficiary may not get the full death benefit if your spouse is entitled to half of it.
Name contingent beneficiaries. You should always keep your policy up to date, but naming a life insurance contingent beneficiaries gives you some room to be flexible. What does contingent beneficiary mean? It's a secondary beneficiary; The difference between a primary and contingent beneficiary is that the contingent beneficiary only comes into play in the even of the demise of yourself and a primary beneficiary. If something unexpected happens, you’ll have a backup plan in place.
Distribute your death benefit per stirpes. Per stirpes means "per branch" and it essentially lets you distribution a death benefit by each branch of the family. So: you have a son and a daughter who are your primary beneficiaries. They each have their own children. If your son dies, the death benefit normally goes fully to your daughter (as described in scenario #3 above). If you distribute the death benefit per stirpes, though, 50% will go to your daughter, and the remaining 50% will be split among your son’s kids.