Distribution by Order of Succession
Primary Beneficiary: The primary beneficiary is the first or principal person in line to receive income tax-free policy proceeds. A policy owner may designate multiple primary beneficiaries and choose different or equal amounts for each beneficiary (or example, 50% to my son Tom, 25% to my grandson Joe, and 25% to my granddaughter Mary. If one of the primary beneficiaries dies prior to the insured, the face amount is paid to the surviving primary beneficiary(s). Unless specifically requested as part of the contract (per stirpes) or required by law, the estate or heirs of a deceased beneficiary will not receive any payment in this case.
Secondary or Contingent Beneficiary: The secondary or contingent beneficiary is the second individual(s) in line to receive the death benefit. They receive the death benefit only if the (or all) primary beneficiary has died prior to the insured. The primary beneficiary must predecease the insured in order for this secondary beneficiary to receive any proceeds.
Tertiary Beneficiary: A tertiary beneficiary is third in line to receive policy proceeds when the insured dies if they survived the primary and contingent beneficiaries. Technically speaking, the policyowner may continue the succession by listing a fourth in line, fifth in line, etc. There is not a limit to the depth of the succession.
Distribution to an Estate
It is important that a policyowner lists all desired beneficiaries and keeps the designations updated as needed. The policy proceeds will be paid to the estate of the insured if none of the listed beneficiaries are still alive at the time of the insured’s death. Benefits paid to an estate are subject to possible federal and state death taxes as well as probate fees prior to being passed on to anyone else. Additionally, creditors may have a right to funds in an estate and, therefore, a right to the proceeds of a life insurance policy paid to an estate.
For example, assume that Mr. Jones purchases a life insurance policy covering his life in the amount of $100,000. He designates his spouse as the primary beneficiary. His only daughter is designated as the contingent beneficiary. However, Mr. Jones fails to designate any of his four sons as beneficiaries. If his spouse and daughter are killed in an auto accident, and five years later, Mr. Jones dies himself and has not made any alterations to the life insurance contract, the death benefit or policy proceeds will be paid to his estate, not to the sons.
Distribution to a Minor
A life insurance company typically will NOT pay policy proceeds directly to a minor beneficiary. While any entity can be named as a beneficiary, many States do not permit proceeds to be paid to a minor since he or she lacks “legal capacity.” In addition to a minor potentially not being competent to handle a large sum of money, a minor may not be able to receive the payment and return a receipt legitimately. For these reasons, a guardian or trustee will typically need to be appointed. In some cases, the insurance company may hold the proceeds, paying interest on them until the beneficiary reaches legal age.
Distribution to a Trust
Trusts may be named as the beneficiary of a life insurance policy and manage the proceeds upon the insured’s death. Naming a trust as beneficiary is the most advantageous designation to use when a policy owner wishes to leave policy proceeds to a “minor” child. In this case, a trustee will manage the trust for the benefit of the child or children. Trust administration fees may reduce policy proceeds.
- Testamentary trusts are created at the insured’s death according to a will.
- Inter Vivos trusts or living trusts are created during the life of the insured.
Facility of Payment
The facility of payment provision permits an insurer to pay a portion (or all) of the policy proceeds to ANY individual who appears to be equitably entitled. Such payment may be provided to a party who paid for the medical or final expenses of the deceased insured. Usually, the facility of payment provision comes into play when a death claim is not filed within two months following the death of the insured. Additionally, this provision may be triggered to assist a guardian when a minor is listed as the beneficiary.
he distribution of life insurance proceeds by order of succession is an important process that ensures that the death benefit from a life insurance policy is distributed to the beneficiaries in accordance with the insured’s wishes. If you have any questions about the distribution of life insurance proceeds by order of succession, you should consult with an estate planning attorney.
Here are some additional things to consider:
- Contingent beneficiaries: If a beneficiary dies before the insured, the contingent beneficiary will typically receive the beneficiary’s share of the death benefit.
- Minor beneficiaries: If a beneficiary is a minor, the life insurance company may pay the death benefit to a trustee to manage on the beneficiary’s behalf until the beneficiary reaches the age of majority.
- Community property laws: If the insured and their spouse reside in a community property state, the spouse may be entitled to a portion of the death benefit, even if they are not named as a beneficiary on the policy.
If you are the beneficiary of a life insurance policy, it is important to contact the life insurance company to learn more about the distribution process.