Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SUNDAY, February 14, 1993 TAG: 9302120277
SECTION: INSURANCE PAGE: INS-11 EDITION: METRO
SOURCE:
DATELINE: LENGTH: Long
THE IMPORTANCE OF BEING CLEAR, EARNEST
A clear, current beneficiary designation is extremely important to the policy owner, the beneficiary, and the insurer. It is important to the policyowner, because he or she purchased the insurance primarily to benefit a certain person, or persons.A beneficiary designation that is clear and current will allow the insurer to carry out the policyowner's intent.
The insurer can readily ascertain who is the proper beneficiary pay that person without delay and obtain a valid release. Neither the beneficiary nor the insurer will have to resort to costly and time-consuming court action to determine the proper payee. While improper beneficiary designations cause much trouble and expense, it is easy to draft a beneficiary designation properly, once certain principles are understood.
The selection of a beneficiary, the wording of the beneficiary designation, and the arrangement of owner-insured-beneficiary often have important legal consequences; the following checklist provides a rundown of some of them.
If the insured's estate is the beneficiary, the policy proceeds will be subject to the claims of the insured's creditors; many state laws insulate insurance proceeds payable to a named beneficiary from creditors' claims.
If the insured is the owner of the policy, or retains any "incidents of ownership" in the policy, the death proceeds will be subject to Federal estate tax. IRC 2042. However, those death proceeds payable to a surviving spouse pass under the unlimited marital deduction. IRC 2056.
If the insured's corporation is the owner of the policy, while his spouse is the named beneficiary, the death proceeds in excess $5,000 payable to the surviving spouse may be income taxable under IRC 101. This is the likely result in the absence of a valid and documented split-dollar arrangement.
If the policy does not name a beneficiary, or if the named beneficiary dies before the insured does, the proceeds will be paid to the insured's estate. The proceeds are distributed in accordance with the insured's will; if there is no will, the home state's intestate succession laws govern.
A "revocable" designation is one that gives the insured the right to change the beneficiary. Consent of the prior beneficiary is not required.
An "irrevocable" designation cannot be changed without the beneficiary's written consent.
Normally, a change of beneficiary may be made only after written notice to the insurance company; the change becomes effective only if it is endorsed on the policy.
A person whose claim under an insurance policy is based on an alleged change of beneficiaries has the burden of proving that the change took place.
The beneficiary designation should be reviewed frequently by the policyowner to be certain it reflects his or her current circumstances. The instances are numerous in which, for example, a long-divorced spouse has collected insurance proceeds, merely because the policyowner neglected to change the beneficiary designation.
In the absence of law to the contrary, the insurer is contractually bound to pay the named beneficiary, no matter how unjust this may appear.
It is also desirable that a contingent beneficiary (or beneficiaries) be named. If a policyowner-insured and the primary beneficiary die at the same time, the policyowner will not have an opportunity to name another primary beneficiary.
Even if the primary beneficiary dies long before the insured, the policyowner might forget to name another primary beneficiary.
Most beneficiary designations are simple. The insurance application contains a section in which the names of primary and contingent beneficiaries are to be written.
The person who is to receive the benefits should be named or described in enough detail so that he or she can be readily identified.
For example, if a policyowner-insured wishes to name her husband as primary beneficiary and her mother as secondary beneficiary, the designation can read as follows: "To William Henry Smith, husband of the insured, if living at the death of the insured; otherwise to Jane Elizabeth Martin, mother of the insured."
If the policyowner-insured wishes to name her estate, the designation can read: "To the executors, administrators, or assigns of the insured."
In the second instance, the designation does not name the person to whom the proceeds are to be paid, since the identity of the executors or administrators cannot be known until after the insured's death.
It does describe the person with sufficient clarity so that he or she can be readily identified. Payment made to the person so described will discharge the insurer of its obligations under the policy.
Use of the terms " stirpes, capita by representation," and " capita at each generation" are advised only where there is a clear understanding of the legal consequences of the choice of distribution system.