When the insured dies, the proceeds from the policy are paid directly to the beneficiary, and they do not go through probate, and they do not do through the estate. The beneficiary receives the death benefit directly from the insurance company.
Since the money from the death benefit proceeds doesn’t go through probate, there is no delay in the beneficiary receiving the money, and there is not usually any dispute about the named beneficiary receiving the money.
A beneficiary can be one person, two people, a charity, a trust, or the estate of the insured.
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Can a beneficiary designation be challenged?
Once a beneficiary is named by an insurance policy owner, it is very difficult to overturn. The presumption in law is that the owner was sound in his or her intent to name a particular person or entity.
This issue is mostly a factor after a person has died, and the family finds out that the named beneficiary is not to their liking, as it may be someone outside of the family or someone of whom the family disapproves.
Legal opinions in this matter say that it would almost be necessary to prove that the owner of the policy, which is in most cases the insured individual, would have to be proven to have been incompetent to overturn the beneficiary that was originally named.
There are instances where the proper disposition of the funds can be unclear because the beneficiary that was named originally has died, cannot be found, or it is ambiguous.
For example, if the insured put on the application that the beneficiary was to be all children of the marriage, it could be very ambiguous what that means when there are no children at all, or the person was never married.
This is why it is urged for people to purchase their life insurance with the help of the broker or life insurance agent.
There is a proper way to name beneficiaries, and that is to always clearly state the full name of the beneficiary and the relationship to the insured.
For example, a correct way to write the beneficiary would be, “Samuel S. Smith, son of the insured,” or “Mildred H. Madison, wife of the insured.” These designations leave no doubt as to whom the death proceeds are intended.
Life Insurance Maintenance
Not only is it important to clearly state the name and relationship of all beneficiaries named in a life insurance policy, it is also important to keep them up-to-date.
If a beneficiary dies, or remarries and has a name change, or becomes incompetent, these changes should be noted in the policy with a beneficiary change or update.
It is very easy to forget about your life insurance beneficiaries when we all have enough to deal with in our normal day-to-day activities.
It is a good idea to schedule an annual review with your life insurance agent or broker and not only review your coverage, but also take care of details like the appropriateness of current beneficiaries.
Can a beneficiary designation be changed if it is totally wrong?
Insurance companies will tend to pay the death benefit proceeds directly to a named beneficiary because that is what they do by law.
They will take the literal interpretation that is named in the policy, and if any sense can be made of it, that is what they will do.
It is not the job of the insurance company to be “fair” where one side or the other might see it, but to do their very best to follow the directive of the initial beneficiary that is named.
If an individual does wish to challenge a beneficiary designation, the very first thing to do is to hire an attorney who has experience in such matter. Most likely, the attorney will research the case law in the appropriate state to find out how courts have ruled in the past on such matters.
Due to the length of time that life insurance companies have been in existence, there is probably not one reason for challenging beneficiary designations that have not be attempted.
The results of all of the previous challenges forms in a body of “case law” which will give a great deal of clarification on how a present day court might rule on any given situation.
If there is a positive possibility of a reasonable challenge, then your attorney will notify the life insurance company of your intent.
While the case is being adjudicated, the insurance company will pay the claim to a trust that is set up by the court in the state that applies, and the court will then decide to whom the benefits will be paid.
Unless the death benefit is a substantial amount, it may not be worth all of the time and expense of hiring a lawyer and paying court costs and fees.
However if there is great confusion about the beneficiary and the amount of the proceeds are substantial, it could be worth it to pursue the challenge.
The Power of Words
Most people don’t realize the sheer power of a few words placed in the beneficiary section of a life insurance application.
Making certain that the designation is clear and unambiguous for both primary and secondary beneficiaries is extremely important.
Just as there is little significance given to proper beneficiary designations, most people don’t realize the significance of life insurance itself, as suddenly there is this great influx of money that literally saves the day.
While it is possible to overturn a named beneficiary designation by family members, friends, and others, it is a very difficult and arduous task. Life insurance companies are not arbiters between factions who are vying for the money.
In the majority of the cases, the life insurance company is bound to follow the law and pay to the named beneficiary, unless it can be proven that there was gross incompetence on the part of the insured/owner, or the beneficiary is so confusing that it makes no sense.
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