Three Uncommon Life Insurance Scenarios

Couple meeting with their insurance agent

In most cases, when the insured on a life insurance policy dies, the proceeds are paid out to named beneficiaries without a hitch. However, you should be aware of certain unusual scenarios that could occur. Speak with our knowledgeable agent for professional help in avoiding potentially tricky situations with your life insurance policy.

Beneficiaries & Insured Persons Die At The Same Time

It is not uncommon for a husband and wife to each purchase a life insurance policy, naming the other as beneficiary. This makes sense because if one spouse dies, the death benefits will go to the surviving spouse and can be used to provide for any children and other needs.

But suppose the husband and wife are traveling together, and both die in the same fatal car accident. In this case, there would be no surviving beneficiary for either life insurance policy. Each spouse’s policy would become part of his or her estate and subject to probate.

A simple solution to this situation is for both the husband and wife to name secondary beneficiaries, or even final (third) beneficiaries for their life insurance policies. Then, in the event they both die in the same accident, the life insurance proceeds will be paid out to someone they themselves have chosen.

The Life Insurance Beneficiary Is A Minor

A divorced woman with a child may decide to purchase a life insurance policy. Naturally, she wants her child to be provided for in the event of her death, so she names her minor child as beneficiary on her policy. If the woman dies unexpectedly while the child is still a minor, the life insurance company will not pay the death benefits directly to the child. The matter will have to go to court, and the court will have to appoint a guardian to manage the proceeds until the child turns either 18 or 21, depending on the state.

This complication could be avoided by setting up a trust for the benefit of the child and naming the trust as the beneficiary on the life insurance policy. This arrangement would allow the mother to personally determine who would manage the funds for her child’s benefit by naming that person as trustee. Another option would be to name an adult custodian of the life insurance proceeds under the Uniform Transfers To Minors Act.

Someone Other Than The Insured’s Spouse Is Named As Beneficiary In A Community Property State

A person who buys a life insurance policy may choose to name someone other than his or her spouse as a beneficiary. Generally, a policyholder can name anyone he or she chooses as beneficiary, as insurance companies do not make moral judgements about who should get the money.

However, if the insured lives in a community property state, this could be a problem. In community property states, both spouses own equally any income earned during the marriage and any property, including life insurance, purchased with that income. If the life insurance policy was purchased with funds that are considered community property, the surviving spouse would have a right to a portion of the death benefits, no matter who was named as beneficiary.