What happens if your life insurance beneficiary dies before you?

Life insurance is all about securing your loved ones’ future, but life doesn’t always go as planned. What if the person you’ve chosen as your beneficiary passes away before you do? Whether you’re exploring life insurance options or already have a policy, understanding what happens in this situation is key to ensuring your plans are still on track. By preparing for the unexpected, you can ensure that your efforts to protect those who matter most aren’t interrupted by life’s surprises. At Bankrate, our team of insurance experts is here to guide you through what happens when a beneficiary dies, offering clear answers to make sure your plans remain secure even when life throws a curveball. 

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What happens when a life insurance beneficiary dies?

Life insurance policies work by providing a death benefit to the named beneficiary when the insured passes away. The policy owner, who is often the insured, chooses who the primary beneficiary or beneficiaries will be. These individuals receive the death benefit once a claim is filed and approved by the insurer.

If your primary beneficiary passes away before you, what happens next depends on how your policy is structured. Here’s a breakdown:

• Primary beneficiaries: The primary beneficiary is the person who receives the death benefit when you pass. There can be more than one primary beneficiary, with each person receiving a specific percentage of the death benefit. For example, if you name both your spouse and your sibling as primary beneficiaries, you could specify that your spouse receives 70 percent of the death benefit and your sibling receives 30 percent.
• Contingent beneficiaries: These are the backup beneficiaries. If the primary beneficiary is no longer alive or unable to receive the money, the contingent beneficiary steps in to receive the payout. Continuing with the example above, let’s say you also name your adult child as the contingent beneficiary. If both your spouse and sibling (the primary beneficiaries) pass away before you, your adult child will receive the entire death benefit as the contingent beneficiary.

Now, if you have multiple primary beneficiaries and one has died, what happens to their portion depends on the policy’s terms:

1. Reverting to the estate: In rare cases, the deceased beneficiary’s share might revert to the insured’s estate. This can complicate matters, as the death benefit would be subject to probate.
2. Dividing among remaining beneficiaries: A more common scenario is that the deceased beneficiary’s portion is divided among the surviving beneficiaries. For example, if you have three primary beneficiaries and one dies, the remaining two would likely split the death benefit equally.
3. Paying the deceased beneficiary’s heirs: In some cases, the deceased beneficiary’s share is passed on to their heirs. However, this is less common.

Because these scenarios can be complicated, many insurers now include a “succession-in-interest” clause in their contracts. This clause allows the insurer to decide how the funds are distributed if the policyholder hasn’t provided specific instructions. Most often, insurers will default to dividing the deceased beneficiary’s share among the surviving beneficiaries.

If there are no living primary beneficiaries, the contingent beneficiary (if named) will receive the death benefit. However, if no primary or contingent beneficiaries are living, the payout is directed to the insured’s estate, which can lead to probate and potential delays.

Per stirpes versus per capita distribution

As a life insurance policyholder, you can decide how your death benefit will be distributed if a beneficiary passes away before you. You have two main options for determining what happens to the deceased beneficiary’s share: per stirpes and per capita distributions. Understanding the differences between these two approaches can help you ensure your death benefit is distributed exactly as you intended.

Per stirpes distribution

Per stirpes makes sure that if a beneficiary dies before you, their share of the death benefit will be passed down to their descendants. This method keeps the inheritance within the family, allowing the deceased beneficiary’s children (or other heirs) to receive the portion intended for their parent.

Example of per stirpes:

Let’s say you have three beneficiaries (A, B and C), and each is set to receive an equal portion of a $300,000 death benefit. That means each beneficiary would receive $100,000. However, if beneficiary C dies before you, under per stirpes, beneficiary C’s children would inherit the $100,000 that was originally meant for C. If C has two children, they would each receive $50,000, while beneficiaries A and B would still receive their original $100,000 shares.

This distribution ensures that your beneficiaries’ descendants receive their parent’s share if the parent is no longer alive, maintaining a generational flow of the benefit.

Per capita distribution

Per capita distributes the death benefit equally among the surviving beneficiaries. If a beneficiary dies, their share is divided among the remaining living beneficiaries, rather than going to the deceased’s descendants.

Example of per capita:

Using the same scenario with three beneficiaries (A, B and C) set to receive a $300,000 death benefit, if beneficiary C dies, the death benefit would now be split equally between the two remaining beneficiaries, A and B. In this case, A and B would each receive $150,000, and beneficiary C’s descendants would not inherit C’s share.

Per capita focuses on splitting the benefit among the surviving individuals rather than passing a portion to the heirs of a deceased beneficiary.

Now that you have a basic understanding, let’s recap some key differences:

• Per stirpes: If a beneficiary dies, their descendants inherit their share. This method ensures that a beneficiary’s family is still included in the payout.
• Per capita: If a beneficiary dies, their share is divided equally among the remaining beneficiaries, without passing any portion to the deceased beneficiary’s descendants – unless specified otherwise.

As the policy owner, you can choose how you want the death benefit to be distributed if a beneficiary predeceases you. You can specify whether you prefer the per stirpes method or the per capita method.

If you don’t specify, many life insurance policies now include a default succession-in-interest clause, where the insurer determines how to distribute the death benefit, usually defaulting to dividing it equally among surviving beneficiaries. By being proactive and specifying your preferences, you can ensure that your wishes are honored.

What happens if the beneficiary is an organization that no longer exists?

If you have named an organization as the beneficiary of your life insurance policy, and then by the time you die, the organization no longer exists, then a couple of different scenarios could happen. The first possibility is that your death benefit would be paid to your estate, where it would be subject to probate as described previously. The second possibility is that another organization that has superseded the organization that you named as your beneficiary may step forward and claim the money.

For example, let’s say you left money to your beloved alma mater, the college you graduated from years ago. But recently, that college, after years of financial struggle, ceased to exist as a separate entity and was absorbed by a larger university nearby. The university may have a claim on your policy since it now owns all the assets of the college and has continued to work with its students, faculty and property.

How to update your life insurance beneficiaries

Updating your life insurance beneficiaries is a straightforward process, but it’s essential to ensure that it’s done correctly to reflect your current wishes. Here’s how to go about it:

1. Contact your insurance provider: The first step is to reach out to your life insurance company. Most insurers have a beneficiary update form, either available online or through your insurance agent. You’ll need to fill out this form to officially make changes.
2. Complete the required form: On the form, you’ll list your new beneficiaries, including their full names, contact information and the percentage of the death benefit each should receive if you are naming more than one. You may also update contingent beneficiaries at this time.
3. Submit the form: Once you’ve completed the form, submit it to your insurance provider. This can typically be done via mail, email or sometimes through an online portal. Make sure to follow up with your insurer to confirm they have received and processed the update.
4. Keep a copy: Always keep a copy of the updated beneficiary form and proof the change was made for your records. This can help prevent any confusion later on and ensure that your beneficiaries are aware of your intentions.

Common reasons why you may update your beneficiaries

Life events often change the way you want to allocate your life insurance benefits. Here are some common reasons to consider updating your beneficiaries:

• Marriage or divorce: You may want to add or remove a spouse or partner as a beneficiary after a marriage or divorce.
• Birth of a child: Welcoming a new child is a significant reason to update your policy to ensure their financial protection. However, naming a child a direct beneficiary isn’t typically recommended since insurers can’t pay proceeds to minors. Instead, choose a trustworthy guardian or create a trust to be the beneficiary to manage money on the child’s behalf.
• Change in relationships: Over time, relationships with friends or family members may shift, prompting a change in how you want your benefits distributed.
• Financial changes: If your financial circumstances significantly change, you may want to reconsider how your life insurance benefits are allocated.
• Estate planning: You might update your policy as part of broader estate planning efforts, such as setting up a trust or changing how assets are distributed to heirs.

By regularly reviewing and updating your policy and beneficiaries, you ensure that your life insurance reflects your current wishes and the needs of those who depend on you.

Frequently asked questions

• What happens if the owner of a life insurance policy dies before the insured?

  When the owner of a life insurance policy passes away before the insured, things can get a bit tricky. If the owner and the insured are different people, the policy doesn’t just disappear. Instead, ownership shifts. If the original owner was thoughtful enough to name a successor owner in the policy, that person will now step in and take control of the policy, handling everything from paying premiums to making changes.

  But what happens if no successor owner was named? In that case, the policy ownership typically passes according to the deceased owner’s will. If there’s no will, the ownership is transferred through intestate succession laws, which determine who inherits based on state guidelines. The new owner will take over the policy until the insured person passes away, and then the death benefit is paid out to the beneficiaries as planned.

• How can I make sure that my life insurance policy is divided up between my beneficiaries on a per stirpes basis?

  Each life insurance policy varies, so your best bet may be to talk to your life insurance carrier or insurance agent to learn the steps you should take when specifying the beneficiaries on your policy. If your life insurance agent is unable to assist you with this, it may be helpful to consult with an estate planning attorney to have the process explained to you.

• If I have unpaid debts when I die, can creditors seize my death benefit?

  If you have a properly named beneficiary on your policy, then the death benefit goes directly to the designated person(s) or organization, and the creditor has no legal recourse to obtain it. However, if you fail to name a beneficiary or a backup and the proceeds default to your estate, then creditors may be able to lay claim to the death benefit paid out after your death during the probate process.