Life insurance is intended to provide your loved ones with some support when you pass away. Your life insurance benefit is typically used to cover expenses like funeral costs, paying off debts, and providing financial support for dependents. When you take out a life insurance policy for yourself, you’ll name your beneficiaries – the people who will receive the death benefit. However, your beneficiary may die before you do. What happens in this instance?
If your beneficiary dies before you do, it’s important to remember to change your policy. On most life insurance policies, you can make adjustments to your beneficiaries at any time. Even if you aren’t initially sure who else you would want to name as your life insurance beneficiary, it’s important to make a decision. This ensures that your life insurance policy will end up in the hands of someone you trust to pay for the funeral and take care of any debts. If you leave a deceased person listed as your beneficiary, it could cause conflict among your family and friends later on.
The first thing that will happen if you pass away and your primary beneficiary is deceased is the insurance company will go to a secondary beneficiary. Many insurance companies will have you list a secondary beneficiary specifically for this purpose. If you have listed multiple beneficiaries and one is deceased, the benefit will just be split among the remaining beneficiaries. If you have not listed a secondary beneficiary, or your secondary beneficiary is also dead, things get a little bit more complicated. In this case, the insurance benefits will automatically become part of your estate. Your estate is usually automatically given to your next of kin unless someone files a legal challenge for it.
Having your insurance benefit become part of your estate poses a few problems. The first is that the insurance money will become subject to taxation. If your family were to receive your insurance benefit directly from the insurance company, they would not have to pay taxes on the money. However, if it comes through the estate, it will likely be subject to taxes, meaning that your family won’t receive as much money as you intended. Some states do have tax laws that will exempt you from paying taxes on some of the death benefit, but not all of it. The other potential issue is that your money could end up going to a family member when you might prefer it to go to someone else, like an unmarried partner. Not only would this go against your wishes, but it could potentially cause conflict among your family.
Insurance benefits can take some time to pay out, which can cause even more potential complications. There are some instances where the beneficiary passes away between the time of the policyholder’s death and the claim being processed. This is a very confusing scenario for everyone involved. Typically what will happen in this scenario is the death benefit will become part of the deceased beneficiary’s estate. This is problematic because there is a good chance the money will end up with someone the original policyholder would not have wanted. The money will also be taxed, which can put an additional financial burden on the trustee of the estate. To prevent this from happening, it is very important to designate a secondary beneficiary on your policy. You can even name more than one contingent beneficiary on your policy if you wish.
The more clearly you communicate your wishes with your loved ones, the less likely complications are to develop. The biggest issues with settling estates happen when there isn’t a clear directive about what to do with remaining money and debts. This creates the perfect opportunity for conflict among family members and friends, mainly if there is already some tension in the family. To prevent this, get in the habit of checking your life insurance policy regularly, particularly after major life changes. Your official documents should always be as up-to-date as possible. Ideally, you should also have a will specifying what to do in the event of your passing. This will give family and friends a more specific idea of your wishes. While it’s not always pleasant to think about, planning these things now will prevent conflict in the future.
If your family is struggling with a complicated life insurance payout, and you believe you are not getting the benefits you are entitled to, it may be worth contacting a lawyer for assistance. A reputable lawyer with experience in estate law and insurance law can help you navigate the tricky legalities of the situation, and fight for the deceased’s wishes.