What if Your Life Insurance Beneficiary Predeceases You?

Losing a life insurance beneficiary can be a difficult situation to navigate. This blog will explore what happens when your beneficiary passes away before you and how it can affect your life insurance policy.  Losing a loved one is never easy, and it can be even more complicated when their passing impacts your life insurance policy. If your beneficiary predeceases you, several scenarios may unfold.

Firstly, it's essential to review your policy's terms and conditions. Some policies require you to name a contingent beneficiary who would receive the death benefit if your primary beneficiary dies before you do. If you have designated a contingent beneficiary, the proceeds will be paid to them instead.  Sometimes, it may make sense to name your revocable trust as a beneficiary -- this is often beneficial if minor children are involved.

If you haven't designated a contingent beneficiary or your policy doesn't allow one, the situation becomes more complex. The life insurance company may require you to update your beneficiary designation in these cases. You must choose a new beneficiary to ensure the proceeds go to the intended recipient.

It's crucial to keep your beneficiary designations current, mainly if any changes occur in your circumstances. This can prevent complications and ensure your life insurance benefits are distributed according to your wishes.

In some cases, if no beneficiary is alive or identified, the death benefit may be paid to your estate. This means that the proceeds become part of your overall assets and are subject to probate, which may delay their distribution.

Most people understand the overall workings of life insurance, but according to a recent article from yahoo! finance, they may not know the answer to this question: “What happens if your life insurance beneficiary dies before you?”

Beneficiaries are typically spouses, family members, friends, or charitable organizations the insured cares about and wants to protect financially after the policy owner dies. However, sometimes, life doesn’t go as planned. If there’s one beneficiary and they die before the insured, an entire plan can be undone. This can be avoided with a few simple steps.

First, make sure you name several contingency beneficiaries, not just one. If there’s only one, and they die before you and no changes were made to the policy, the proceeds from the policy will most likely be paid directly into your estate upon your death.

This means the entire amount will go through probate, making it accessible to creditors and visible to anyone who wants to look up your will information. If there are outstanding debts, from a home mortgage to student loans or debts to the IRS, claims may be placed on your estate, including the insurance policy death benefit.

It’s possible your friends, relatives, or business associates could find themselves embroiled in an estate battle over these funds. Having a secondary and even a tertiary beneficiary named on the policy isn’t difficult to do and can prevent unnecessary litigation and disputes among loved ones.

If you’ve named more than one primary beneficiary and the primary beneficiary dies, in most cases, the death benefit proceeds from the life insurance policy will usually be distributed among the remaining beneficiaries. How it is distributed will depend upon whether or not it’s done on a per stirpes or per capita basis.

Per stirpes means the money will be divided equally between beneficiaries if the primary dies. If the proceeds are to be split between two children, but one has died before you, the surviving beneficiary still gets their intended share. The other share is still divided equally among the deceased beneficiary's children. Under a per capita arrangement, the death benefit would go to the remaining primary beneficiary.

What if you’ve named a nonprofit organization, but it shuts down or is absorbed by a different organization? A few different scenarios may occur. One is that the death benefit could be paid to your estate, which would be subject to probate. The second is the organization that superseded the organization you named as your beneficiary may step forward to claim the benefit.

Talk with your beneficiaries about any life insurance policies where they are the beneficiaries, and let them know your wishes for how the death benefit will be distributed. After you pass, they must contact the insurance company, ideally with a copy of the policy. They won’t automatically get the benefit unless they make a claim to the money and provide the required proof. Your estate planning attorney should be informed of your policy and beneficiaries so they can help when it comes.

While losing a beneficiary may present challenges, understanding the implications and taking proactive steps to address them can help protect your loved ones and ensure your life insurance policy serves its intended purpose.

Reference: yahoo! finance (September 5, 2023) “What happens if your life insurance beneficiary dies before you?”