Can a life insurance company change the beneficiary?
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UPDATED: Jul 24, 2011
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When a person buys a life insurance policy, it is necessary to name a beneficiary. This is the person or entity who will receive the proceeds of the policy when the insured person dies. Normally, this is a simple procedure which involves the insured person naming an individual, a group of people, or a business or charity as the beneficiaries, and signing the appropriate documentation. Only the owner of the policy has the right to change a beneficiary; the insurance company cannot do so. There are special circumstances, however, which require a slightly different procedure.
When a Named Beneficiary Dies
One scenario that may change the beneficiary of an insurance policy without the owner’s signature is when the named beneficiary dies prior to the insured person. It is best at that point for the insurer to name a new beneficiary, but if he or she dies prior to doing so, the insurance company must determine who the new beneficiary will be. If a secondary beneficiary has been named, then the proceeds will go to that person; however, if no other beneficiaries exist, most companies will simply forward the proceeds of the policy to the insured’s estate, and it will become part of the property that passes through probate court. It is also possible that an insured and a beneficiary could die at close to the same time; if this happens, the company will make an effort to determine who died first, and will forward the money to the estate of the survivor. If it cannot be determined who died first, then the money will go into the insured’s estate.
This can have significant consequences from a tax standpoint. If a beneficiary receives life insurance proceeds, that money is not taxable per se. However, if an insured person has the money replaced in his or her estate, inheritance taxes may apply and much of the money may be taken by the government. Federal and state laws both apply in the cases of estate tax, so it is important to understand your state’s laws, the relative size of your estate, and how to prevent estate taxes from being assessed on your heirs.
Disputes by Survivors
There are a few other situations that may arise which cause an insurance company to change a beneficiary without the consent of the policy owner. In some cases, a lawsuit is filed by the survivors of the insured, contending that the named beneficiary coerced the insured. It is possible that a court could order the proceeds of the policy be paid to others than the named beneficiary. If this happens, an insurance company has no choice but to comply. This situation usually arises when an insured has suffered some mental degeneration and it can be proven by the survivors that the insured was not of sound mind when naming the beneficiary. Obviously, this is not a common occurrence.
An insured may also name an agent through a power of attorney, and if the insured becomes incapacitated, the agent may change the beneficiary in the insured’s name. In this case, the agent is acting as the insured, so it is legally the same as if the insured had done it for himself or herself.
For the most part, however, life insurance companies are careful to honor their agreements with the owners of insurance policies, and will not make changes to a beneficiary without the express written consent of the owner. This is for the protection of the owner, and also for the protection of the company. Since naming a primary and secondary beneficiary is so simple, there is no reason anyone cannot have more than one named beneficiary to prevent most of these issues from arising.
How to choose a Life Insurance Beneficiary
When choosing a beneficiary, it is important to make sound decisions. Children, for example, cannot inherit life insurance proceeds, so they must have a trustee to manage that money for them until they reach legal age. An incapacitated adult may face the same issue. Dividing life insurance proceeds among family members could result in lawsuits if some members are ignored or given very small amounts, so it is important to think carefully about your beneficiaries and not act in anger. No matter what you decide about your beneficiaries, you should talk to your agent to be sure that you understand all the implications of your choices, and that your beneficiaries are named in the order that you intend. If you feel there may be some mistake in the ordering of your beneficiaries, be sure to contact your agent immediately to change your policy.