It’s been a while since I’ve updated this part of the life insurance process and there are some things that have changed and some that I simply need to redunderfy. Beneficiary designations are often not taken as seriously as they should be and can end up being problematic at best and just a little disastrous at worst.
Just a quick refresher. A primary beneficiary is the first person you want the death benefit to go to when you die. No one else can lay claim to the money and unless you are deceased as well, no one else can file the claim. You can have more than one primary beneficiary like a client I’m currently working for who put down his girlfriend for 50%, his wife he is separated from for 20% and each of his three kids for 10% each. That is legal, but does bring up an often overlooked issue with the designation of a beneficiary who doesn’t have a legal insurable relationship with you. Let’s look at the simplest life insurance arrangement, a husband with the wife as a beneficiary. If the husband dies the wife files a claim and is paid the death benefit. Things get a little more complicated during the 2 year contestability period because the life insurance company will need to have a medical release signed to allow them to pull records and investigate anything that may have been overlooked in underwriting that may be connected with the death. Again, if the beneficiary is the spouse there shouldn’t be an issue.
So, let’s open up a can of worms and see all the ways things can get messed up. If a death occurs in the case above during the two year contestable period, medical records will need to be acquired. If the ex wife isn’t desperate for the money and wants to jack with the girlfriend, she can refuse to sign the medical release. Unless the insured has given a medical power of attorney to his girlfriend, or unless they have married, she doesn’t have the legal right to sign that release and if no one signs it the process hits the stall button and everything will grind to a halt. No claim will be paid until the investigation is done. I actually had a client who was the fiancee of the insured when he died. She didn’t have a power of attorney and asked for his mother to sign it. His mother refused to sign it unless she got a cut of the money. After a lengthy court battle the mother had to sign to release and didn’t get anything, but, well, money can do strange things to people even when the intent of the insured is clear.
The lack of a medical power of attorney can create problems for people who are living together, gay couples in states that don’t allow marriage, and people who buy life insurance when they are engaged. When having a business buy/sell agreement worked on by an attorney, partners should be sure that the agreement includes a medical power of attorney for the release of records. While this is generally only an issue during the two year contestability period, it can be a real pain.
Another beneficiary foopah is not naming a contingent beneficiary or making the contingent beneficiary a minor child. Both of these lead to probate issues and for those who aren’t familiar with probate, it’s a Greek word that means, ridiculously long drawn out stupid process. I joke with clients that if they don’t have anyone to use for a contingent beneficiary, use me. I won’t even charge anything. Seriously though, put in someone so that if you and your beneficiary are killed in a common accident, the money goes to a person, not to probate court. Or leave it contingently to a charity. Or set up a trust that has a plan.
And seriously, don’t make your spouse the beneficiary and your 1, 3 and 5 year old children the contingent beneficiaries. The insurance company can’t release any money, let alone hundreds of thousands or millions of dollars to a minor. That money will be held until the children are adults or until some legal instrument is put in place that will allow the monitored used of the money for the children by their new guardians.
Bottom line. Don’t think the job is done by buying insurance and having a beneficiary. That’s a good start, but following through on the rest of the story can ensure that your best intentions don’t go down in flames. If you have questions about your beneficiary arrangement or feel like your current agent has left you in a precarious position, call or email me directly. My name is Ed Hinerman. Let’s talk.