“Who should I name as my beneficiaries to my life insurance policy?” is a question we hear frequently around here. For those of you who are unfamiliar with the term, a beneficiary is the person(s) (or entity, as in a trust) named in a life insurance policy (or other financial product, such as IRA or 401K) to receive the life insurance death benefit (or balance of account, such as IRA or 401K) upon the death of the insured person (or account holder).
Beneficiaries are named in the application, but can be reviewed and modified at a later date. One can name primary and contingent (secondary) beneficiaries and can divide each category as needed. For example, a man with two children will typically name his wife as the primary beneficiary and his children equal (50% each) contingent beneficiaries.
If he dies, the death benefit would automatically go to his primary beneficiary. However, if his wife also dies (i.e they both die in a car accident), the benefit in this example would be divided equally between his two children, as the contingent beneficiaries. Under the Uniform Simultaneous Death Act, if both the insured and his/her beneficiary die simultaneously (as determined by state laws), the death benefits are paid as if the insured survived the beneficiary. The law actually gives some leeway to the term “simultaneous,” by stating that if two or more people die within 120 hours of each other, each will be deemed to have died before the other.
Now I’m going to make this a little more complicated (actually the law does). To make it a bit less confusing, I’m going to name the the couple John and Mary. We’re going to assume that this is a second marriage for both of them and that they each have children from the previous marriages. Let’s say now, that in the above accident, Mary survives John by six days (144 hours). Because it can be established that Mary survived John by greater than 120 hours, the death benefit is payable to her (regardless of whether any contingent beneficiaries are named).
Upon Mary’s death less than a week later, what happens to those proceeds from John’s policy? Did she have a will and was it brought up to date to include her children she had with John? If not, which family members would receive those benefits according to her state law. Would the children she had with John (who were contingent beneficiaries on the policy) receive anything?
This extreme case was illustrated to point out the need for frequent life insurance policy review, if for no other reason than to review the beneficiaries of the policy and make changes, as needed. Have you had additional children since you purchased your policy? Have you been divorced, widowed or remarried? In all these situations, a beneficiary change (which is very simple to do) would be needed.
I want to thank American General Life Insurance Company for some of the information used in this post.