What happens when your life insurance beneficiary dies before you?

The benefits of life insurance are intended to help financially support your loved ones after you die. When you buy a life insurance policy, you must name the beneficiaries who will receive the death benefit after you die. There are usually no limits to the number of beneficiaries you can name on your life insurance policy, which means you can name as few or as many as you want, depending on the type and terms of your policy.

In general, most policyholders anticipate that the life insurance beneficiaries they name will outlive the policyholder. However, in some cases, a named beneficiary may die before the death benefits on your policy are paid out. If this occurs, it will create a void that will require proper documentation to fill, as updates to the policy will be required. Otherwise, it could lead to legal issues and disagreements when it comes time to distribute the policy's death benefits.

What happens when a sole beneficiary dies?

If you are the policyholder, you must name at least one primary beneficiary in order for the life insurance company to accept your application and provide coverage. However, if your primary beneficiary passes away before you, the death benefit will be paid to any contingent beneficiaries you named on your application.

If no contingent beneficiaries exist, the death benefit will almost certainly be paid directly into your estate. If this occurs, the full amount of the policy's death benefit will be processed through probate court, where it will be open to public scrutiny and can be seized by creditors. If you have outstanding debts, such as back taxes, a mortgage, or student loans, the IRS or other lending institutions may try to recoup their money by filing a claim against your estate.

In extreme cases, your friends, relatives, or even business associates may try to take your money for themselves and become embroiled in a lengthy court battle over your estate. In this case, your money could end up in the hands of someone you did not intend to leave it with. As a result, financial planners and insurance professionals strongly advise you to name at least one contingent beneficiary, and in some cases, a tertiary beneficiary. This can help you avoid unnecessary litigation and legal disputes among your family members.

What happens if one of multiple beneficiaries dies?

If you have named more than one primary beneficiary, or if the primary beneficiary has died and you have more than one contingent beneficiary, and one of them has died, the death benefit proceeds from your policy will typically be distributed among the remaining beneficiaries. The method of redistribution will differ depending on whether it is done per stirpes or per capita.

You could, for example, name your spouse and a sibling or children as co-primary beneficiaries, with each receiving half of the death benefit. If one of them dies, the other will receive the entire death benefit. Alternatively, you could have three primary beneficiaries, each receiving one-third of the death benefit. If one of them dies, the other two will each receive half of the death benefit. If you do not want your money distributed in this manner, you must take steps ahead of time to ensure that your death benefit is distributed in the manner that you prefer.

What happens if the beneficiary is an organization that no longer exists

If you named an organization as the beneficiary of your life insurance policy and the organization no longer exists when you die, one of two things could happen. The first possibility is that your death benefit is paid to your estate, which is subject to probate as previously described. The second possibility is that another organization that has superseded the one you named as your beneficiary will come forward and claim the funds.

For example, you could leave your money to a closely held business that operated as a limited liability company or partnership before reorganizing as a C corporation and going public. The new company may present legal documents demonstrating that they now own the rights to all receivables held by the business in its previous form. The death benefit could then be awarded to the new company.

How to protect beneficiaries

The absence of one beneficiary from a life insurance policy should have no negative consequences for the remaining beneficiaries. The following steps may be useful in ensuring that the named beneficiaries receive your death benefit as you intended:

• Specify a contingent beneficiary: Specifying a contingent beneficiary on your policy is one of the most effective ways to be prepared in the event that a primary beneficiary dies before the death benefit on a policy is distributed. Contingency beneficiaries keep your death benefit from being distributed to your estate.
• Designate proper proportions: If you have multiple beneficiaries but the death benefit funds are not to be split equally, you must typically state the exact percentages that each will receive in the policy. Otherwise, it may result in legal disputes during the settlement process.
• Policy revision: Whether you get married, start a family, or lose a spouse, life-changing events necessitate updating your life insurance policy to include your beneficiaries' current contact information. If you want a minor beneficiary to receive the money only after they reach the age of majority, you can set up a revocable trust to hold the death benefit funds until they reach the age of majority.
• Keep beneficiaries updated: A life insurance beneficiary does not automatically receive a death benefit; they must file a claim with sufficient proof. Make sure your beneficiaries are aware that they are covered by your life insurance policy, including all information about the insurer and policy terms, so that they can make a claim for the money as soon as you die.

Per stirpes versus per capita distribution

Your death benefit can be distributed either per stirpes or per capita. If the primary beneficiary dies, the money is divided equally among his or her descendants. For example, if the money is to be split between two of your children but one of them dies before you, the surviving beneficiary receives their intended share but the other share is divided equally among the deceased beneficiary's children.

In the same situation, but under a per capita arrangement, the death benefit would be divided equally between the remaining primary beneficiary and each of the other beneficiary's descendants. As a result, the primary beneficiary may receive less than what was originally intended.