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

Life insurance is typically owned by an individual. While the policy owner and the insured are generally the same, this is not always the case. It is often expected that the policy owner is also the insured, or will outlive the insured named in the policy. However, if the insured and the policy owner are not the same person, you should be aware of what happens to the ownership of the policy when the policy owner dies.

Ownership vs. Insured

The policy owner is the person who owns the life insurance contract. The insured is the person whose life is insured under the policy. The policy owner controls all functions of the policy, can borrow any available cash value from the policy, can reassign ownership of the policy and can terminate the policy.

However, the owner of the policy can only manage the account in these ways IF the insured person is still alive. The ability to change anything is terminated upon the death of the insured individual and the benefits are disbursed at that time.

Death of the Insured

When the insured dies, the policy will terminate. This termination will result in the policy's death benefit being paid out to the beneficiary or beneficiaries named in the policy. A death claim needs to be filed with the insurance company. Once this is done, money will normally be paid within a number of days that will depend on the individual policies and procedures of the specific insurance company.

Death of the Policy Owner

If the policy owner dies, and the policy owner and the insured are not the same person, the ownership of the policy will revert to the insured. If the insured is not beyond the age of majority (normally ​18 years​ of age in most states), the policy ownership is transferred to a legal guardian until the insured has reached the age of majority. In

Considerations for Establishing a Policy

One major consideration when setting up a life insurance policy is who will own the policy. Policy ownership can dramatically affect what happens to the life insurance policy. Because of this, life insurance companies will only allow policy owners to take out life insurance policies on people in whom the policy owner has an insurable interest.

This normally includes only the policy owner and immediate family members (spouse and child). Other examples of insurable interest persons would be business partners.

Misconceptions About Ownership

A common misconception is that the policy owner is always the insured. This is usually true; however, there are instances where this is not true. For example, the policy owner may be a parent taking out a life insurance policy on a child or a businessman taking out a policy on his business partner.

Life insurance benefits are meant to help support your loved ones financially after your passing. There is no limit to the number of beneficiaries you can name on your life insurance policy and its death benefit will be distributed among them once you are gone, according to your policy type and terms.

Typically, a life insurance beneficiary is expected to live longer than the insured, but there may be instances when a named beneficiary dies before the benefits have been paid out. A life insurance policy has similarities to a will — if a beneficiary dies and leaves a void, proper documentation is needed to ensure the void is filled to avoid legal hassles and disputes. If the sole beneficiary — or one of the several named on the policy — passes before the insured, updates should be made to help prevent disruptions when the time comes to disperse the policy’s death benefits.

What happens when a sole beneficiary dies?

If you are the insured on a life insurance policy, you will have to name at least one primary beneficiary in order for the life insurance carrier to accept your application and implement coverage. But if your primary beneficiary dies before you do, then the death benefit would be paid to any contingent beneficiaries that you named on your application.

If there are no contingent beneficiaries, then the death benefit will most likely be paid directly into your estate. If this happens, then the full amount of the policy’s death benefit will go through a probate court, where it is open to public scrutiny and can be seized by creditors. If you have outstanding debts, such as back taxes, a mortgage or student loans, the Internal Revenue Service or other lending institutions may try to recoup their money by placing a claim on your estate.

In extreme cases, your friends, relatives or even business associates may try to get your money for themselves and can become embroiled in a courtroom battle over your estate that could last for several years. In this event, your money may end up in the hands of someone you didn’t intend to leave it to. For this reason, financial planners and insurance professionals strongly recommend that you name at least one contingent beneficiary and even a tertiary beneficiary in some cases. This can prevent unnecessary litigation and legal disputes among your loved ones.

What happens if one of multiple beneficiaries dies?

If you have named more than one primary beneficiary, or if the primary beneficiary is deceased and you have more than one contingent beneficiary and one of them has died, then the death benefit proceeds from your policy will typically be redistributed among the remaining beneficiaries. The manner of redistribution will depend on whether it’s done on a per stirpes or per capita basis.

For example, you could name your spouse and your sibling or children as co-primary beneficiaries with each of them getting half of the death benefit. If one of them is deceased, then the other one will get the entire death benefit. Or you could have three primary beneficiaries with each of them getting a third of the death benefit. Then, if one of them has died, the other two would each get half of the death benefit. If you don’t want your money to be distributed this way, then you’ll need to take steps beforehand to ensure that your death benefit is distributed in the manner that you desire.

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, you could leave your money to a closely held business that functioned as a limited liability company or partnership and then the company restructures itself into a C corporation and goes public. The new company may come forward with legal documents showing that they now own the rights to all receivables that were held by the business in its previous form. The new company could then be awarded the death benefit.

How to protect beneficiaries

The departure of one beneficiary from a life insurance policy should typically not have a negative impact on the other beneficiaries. To help ensure the named beneficiaries receive your death benefit as you intended, the following steps may be helpful:

• Name a contingent beneficiary: Having a contingent beneficiary listed on your policy is one of the most effective ways you can be prepared for the event of a primary beneficiary passing prior to the death benefit on a policy being distributed. Contingency beneficiaries prevent your death benefit from going to your estate.
• Designate proper proportions: If you have multiple beneficiaries but the death benefit funds are not to be split equally, then you are typically required to state in the policy the exact percentages that each will receive. Otherwise, it might cause legal disputes at the time of settlement.
• Update policy: Whether you get married, start a family or lose a spouse, life-altering events make it necessary to update your life insurance policy to include the current contact information of your beneficiaries. If you want a minor beneficiary to get the money only after they become an adult, you may also choose to create a revocable trust where the death benefit funds will be held until they are old enough.
• Keep beneficiaries informed: A life insurance beneficiary does not automatically get a death benefit — they are required to make a claim to the money with sufficient proof. Make sure your beneficiaries know that they are included in your life insurance policy with all the details about the insurer and policy terms to allow them to make a claim to the money after your death without delay.

Per stirpes versus per capita distribution

The distribution of your death benefit can either be per stirpes or per capita. The former involves the money being divided equally between descendants if the primary beneficiary dies. For example, if the money is to be split between two of your children but one of them has died before you, the surviving beneficiary still gets their intended share but the other share is divided equally among the children of the deceased beneficiary.

In the same situation but under a per capita arrangement, the death benefit would be split equally between the remaining primary beneficiary and each of the descendants of the other beneficiary. This can potentially result in the primary beneficiary getting less than what was originally intended.

Frequently Asked Questions

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

Your life insurance carrier or insurance agent should be able to describe what steps you need to take when you specify the beneficiaries on your policy. If they are unable to do this, consult with an estate planning attorney who can explain this process to you.

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

If your death benefit is paid into your estate, creditors can possibly lay claim to your money. However, this scenario can only happen if you have no beneficiary named on your policy. But if you have a beneficiary properly named on your policy, then the death benefit will go directly to the designated person(s) or organization and the creditor will have no legal recourse to obtain it.

What if I need to change my beneficiary?

Your life insurance carrier or insurance agent can guide you through the process of adding or changing a beneficiary on your existing life insurance policy. Typically, you will either have to fill out a form, either on paper or online, or you may be able to do it over the telephone. Some insurers may also require the change form to be notarized in order for it to be binding. The exact procedure varies by carrier and policy type.

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