Beneficiaries

Beneficiary Designation

The beneficiary is who will receive the policy proceeds upon death of the insured. Insurable interest rules do not apply to beneficiaries. As long as the policy owner has an insurable interest in the insured’s life, the beneficiary need not. For example, you may be named the beneficiary of a policy on the life of a distant relative with whom you have no insurable interest.

Revocable vs. Irrevocable

If a beneficiary is named revocable the owner has the right to change the beneficiary without his/her consent. Because of the flexibility it provides, it is the more common designation.

With an irrevocable designation, the owner loses the right to change the beneficiary or to assign the policy without the beneficiary’s permission. The beneficiary has a vested right to policy benefits.

Primary vs. Contingent

The primary beneficiary is the first, or primary, person (or persons) to receive benefits. It can be split between several people, if desired. The contingent beneficiary will receive benefits only if the primary beneficiary is deceased at the death of the insured. If the primary and contingent beneficiaries pre-decease the insured, the final beneficiary is the insured’s estate.

Common beneficiary designations include:

• Individuals. The most common designation is to name one or more individuals. If multiple people are named beneficiary, per capita and per stirpes are used.

Under a per capita beneficiary designation, if one of the named beneficiaries pre-deceases the insured, the remaining beneficiaries divide his/her share, in addition to receiving his/her own.

Under a per stirpes (Latin for “through the root”) designation, the proceeds belonging to the deceased beneficiary would not go to the other beneficiaries, but to his/her heirs.

• Class Designations. Often used when several children are named beneficiary and the owner wants them to share the proceeds equally, such as “all my children,” rather than naming each child individually.
• Estates. If no beneficiary is named, or if all named beneficiaries have pre-deceased the insured, the final beneficiary is the insured’s estate.
• Minors. A minor may be named as beneficiary if a guardian is appointed to receive the funds on his/her behalf.
• Charities. It is not uncommon for the owner of a life insurance policy to name a charity as beneficiary.
• Trusts. Trust accounts are often established to receive proceeds from a life insurance policy. When a trust is named as a beneficiary, the trustee may manage the assets as he/she sees fit, as long as the trustee does not personally benefit from the trust.

Spendthrift Clause

This clause lets the policy owner choose a settlement option under which the beneficiary will receive benefits over time. It prevents the proceeds from being subject to assignment or anticipation of any claims by the beneficiary’s creditors, or “subject to transfer, commutation, or encumbrance, or to any legal action taken by the creditors against the beneficiary.” It also prevents the beneficiary from receiving a lump sum distribution. The spendthrift clause is often used to protect beneficiaries from creditors (or sometimes themselves, if they are poor money managers).

Common Disaster Clause

The majority of the states enacted the Uniform Simultaneous Death Act. Although some slight variations exist from one state to another, the law essentially provides that the death benefit will be paid as if the insured had outlived the beneficiary if they die simultaneously. This prevents the death benefit from passing into the estate of a beneficiary who is already deceased only to be distributed immediately from that estate, a wasteful procedure that precipitates additional legal proceedings, costs, and estate taxes. The common disaster clause states that the primary beneficiary must survive the insured by a number of days (usually 30-90 days) or the death benefit is automatically paid to the contingent beneficiary.

Insuring Clause

This clause states the promise of the company and includes the insured’s name, face amount, and when and to whom the company will make benefit payments.

Consideration Clause

This clause summarizes the cost of the policy, including the premium amount and frequency (mode of payment), the number of years the premium is to be paid, and the grace period, and it explains the additional cost of any policy riders. The consideration clause also details the insurer’s obligation to pay the death benefit.

Free Look (Right to Examine)

State law requires insurers to allow a policy owner to return a contract within 45 days of application or 10 days from date of delivery (20 days if replacing existing coverage) and receive a full refund of premiums paid. No reason need be given for the return.

Entire Contract Clause

This provision states that the policy, plus the application and all riders, attachments, waivers, notes, reports, etc. represent the entire contract and will be admissible in court.

Lesson Summary

• Beneficiary Designation: The beneficiary is the recipient of the policy proceeds and can be named revocable or irrevocable. Beneficiaries can be primary, contingent, individuals, estates, minors, charities, or trusts.
• Spendthrift Clause: Offers a settlement option where proceeds are received over time and helps protect beneficiaries from creditors.
• Common Disaster Clause: Ensures that if the primary beneficiary does not survive the insured, the benefit will pass to the contingent beneficiary.
• Insuring Clause: Details the company’s promise, insured’s information, face amount, and payment terms.
• Consideration Clause: Outlines policy costs, premiums, payment frequency, grace period, and details on any policy riders.
• Free Look: Allows returning the policy within a specified period for a full refund without giving a reason.
• Entire Contract Clause: States that the policy, application, riders, and attachments together represent the entire contract and can be admissible in court.

Chapter Vocabulary