Few life insurance or annuity applications explicitly name “estate of the insured” as the beneficiary of the death benefit. However, most likely insurance companies default to the insured’s estate when no specific beneficiary is listed.
What’s wrong with naming the estate to be the beneficiary, either explicitly or by default?
If the estate is the beneficiary, the access of the heirs to any money associated with the financial product is delayed because the money must go thought probate. With probate, in some cases, the delay can be a year or more. Any asset forced through the probate process becomes part of the public record, so privacy is lost. Perhaps most importantly, in most jurisdictions, the life insurance money becomes subject to the claims of creditors of the decedent’s estate, a situation that does not exist where there is a named beneficiary.
If the decedent has no valid will at the time of death, the intestate rules of the state of residence at the time of death will dictate who will be entitled to the death benefits. Will the state’s default provisions match the decedent’s intentions? In many cases, the answer will be no.
If there’s no named contingent beneficiary and if the primary beneficiary has predeceased the insured, in most cases, the insured’s estate will be the default beneficiary.
It’s always the best practice to name contingent beneficiaries. Some more sophisticated producers even go so far as to name a second set of contingent beneficiaries in case both the primary and contingent beneficiaries have predeceased the insured.
But perhaps the biggest mistake of all is the one very few people even know about. I’m referring to the words “Per Stirpes”, which should be after most beneficiaries, names on life insurance or annuity contracts. If you’ve never heard of this before, don’t worry, neither has your agent. In fact, I have only run across a few top financial planners who even know what this is.
Now, if you’re still reading this column, it probably means that I haven’t put you to sleep yet with boring legal terms or examples. So as not to press my luck, let me just sum things up this way. This column today isn’t long enough for me to go into all the details of what this could mean for your family, but if you want to make sure you don’t dis-inherit any of your kids or grandkids, it would be a good idea to have your beneficiary designations reviewed by someone who really understands all the ins and outs of protecting your hard-earned money,