Beneficiaries | Life Insurance Provisions

Beneficiary Designation

The beneficiary is the person or entity who will receive the policy proceeds upon the 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 at the time of policy issuance, the beneficiary does not need to have one. 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 person (or persons) to receive benefits. Proceeds can be split between multiple 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 predecease the insured, the final beneficiary is the insured’s estate.

Common beneficiary designations

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 or trustee is appointed to receive the funds on the minor’s behalf.

Charities:

It is not uncommon for the owner of a life insurance policy to name a charity as beneficiary.

Trusts:

Trusts 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 according to the trust terms but may not personally benefit from them.

Sidenote

Know this...

An inter-vivos trust is established while the policy owner is still living. A testamentary trust is established to receive life insurance proceeds, but is not a taxable entity until the moment of death.

Beneficiary types

Spendthrift Clause

This clause allows the policy owner to choose a settlement option under which the beneficiary will receive benefits over time. It prevents the proceeds from being assigned or claimed by the beneficiary’s creditors, and it also prevents a lump sum distribution. The spendthrift clause is often used to protect beneficiaries from creditors or from poor money management.

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), and the additional cost of any policy riders. The consideration clause states the policy owner’s consideration (the premium) and the insurer’s consideration (the promise to pay the death benefit) but does not address the grace period, which is provided in a separate policy provision.

Free Look (Right to Examine)

State law generally requires insurers to allow a policy owner to return a contract within 10 days from the 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. Some states offer longer free-look periods for certain age groups or specific products, but the period begins on delivery, not on the application date.

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 or poor money management.
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: States the policy cost, premium frequency, and the obligations of both the policy owner and insurer. The grace period is a separate provision.
Free Look: A period of time, beginning on the date of policy delivery, during which the purchaser of an insurance policy or annuity can cancel the contract for a full refund of premiums paid, with no penalty. The length of the period is set by state law — commonly 10 days, 20 days for replacement policies, and longer in some cases.
Entire Contract Clause: States that the policy, application, riders, and attachments together represent the entire contract and can be admissible in court.

Chapter Vocabulary

Definitions

Beneficiary: (1) A person or entity designated to receive benefits under an insurance policy, other than as the insured. (2) In Medicare, any person enrolled in the program.
Common Disaster Provision: A provision in a life insurance contract stating that the primary beneficiary must survive the insured for a specified period of time (commonly 30–90 days) in order to receive the proceeds. If the primary beneficiary does not survive the insured for this period, the proceeds are paid to the contingent beneficiary.

Example: Rob names his friend Matt as the primary beneficiary and his wife Yvonne as the contingent beneficiary. Their policy has a 60-day survivorship requirement. Rob dies in an accident, and Matt dies six months later from unrelated causes. Because Matt survived Rob by more than 60 days, he receives the proceeds. Upon Matt’s death, the proceeds become part of his estate.

Contingent Beneficiary: A secondary beneficiary designated to receive the proceeds of a policy if the primary beneficiary predeceases the insured, or dies in a common accident.
Entire Contract Clause: A provision in an insurance contract stating that the entire agreement between the insured and the insurer is contained in the contract, including the application if it is attached, declarations, insuring agreements, exclusions, conditions, and endorsements.
Free-Look Period: A period of time, beginning on the date of policy delivery, during which the purchaser of an insurance policy or annuity can cancel the contract for a full refund of premiums paid, with no penalty. The length of the period is set by state law — commonly 10 days, 20 days for replacement policies, and longer in some cases.
Insuring Clause: The provision of an insurance policy containing the insurance company’s promise. It established the obligation of the company to provide the insurance coverage as stated in the policy.
Irrevocable Beneficiary: A life insurance policy beneficiary who has a vested interest in the policy proceeds even during the insured’s lifetime because the policy owner has the right to change the beneficiary designation only after obtaining the beneficiary’s consent.
Per Capita (Latin: by heads): Applied to beneficiaries, it refers to division of policy proceeds among the surviving beneficiaries.
Per Stirpes (Latin: by roots): Applied to beneficiaries, it refers to division of policy proceeds among surviving beneficiaries with a full share to the heirs of any deceased beneficiary.
Primary Beneficiary: The beneficiary named first to receive proceeds or benefits of a policy that provides death benefits.
Revocable Beneficiary: The beneficiary in a life insurance policy in which the owner reserves the right to revoke or change the beneficiary.
Spendthrift Clause: A clause that may be written into a life policy providing that a beneficiary or creditor cannot subject the proceeds or payments received under the settlement option to transfer, commutation, or encumbrance, or to any legal action taken by the creditors against the beneficiary.