A couple, both in their 70s, own life insurance policies. They named each other as the primary beneficiary on their policies, and listed their three adult children as contingent beneficiaries, with the benefits divided equally. The three children are married, and each has children of their own.
Several years later, one adult son, who had two children, dies in an accident. When the husband/father passes away after a lengthy illness, the wife/mother receives the proceeds from his life insurance policy. In the midst of the turmoil that accompanies the loss of her husband, the wife neglects to change the beneficiary designations on her policy. Five years following, the wife/mother also dies. Who receives the life insurance benefits from her policy?
The husband, having predeceased her, cannot be the beneficiary, so the contingent beneficiaries are now in line to receive the proceeds—i.e., the three adult children named in the mother’s policy. But one of the children has also passed. Now what happens? Do the surviving children divide the benefit 50-50, or is a portion of the policy designated for the deceased son’s family? It depends on the language in the contingent beneficiary designations.
Specific and Class, per stirpes and per capita
A beneficiary can be either specific (a person identified by name and relationship), or a class designation (a group of individuals such as the “children of the insured”). Naming specific beneficiaries is usually straightforward, but poorly defined class designations can cause problems. In the example above, it is important to clarify if “children of the insured” means only lawful children, adopted children or children by a former spouse.
Once the “children” definition is resolved, a further clarification is whether the beneficiary designation remains intact if one of the beneficiaries dies before the insured. The Latin terms “per stirpes” and “per capita” are typically used to make this distinction. Per stirpes means “by the root,” indicating the share that would have been paid to a beneficiary is now passed on to the beneficiary’s family. In contrast, per capita is “by heads,” and indicates that only living beneficiaries will receive proceeds.
If the contingent beneficiary situation at the beginning of the article contained per stirpes language, the distribution of proceeds would be as follows: If the life insurance benefit was $300,000, the two surviving children (C and D) would each receive $100,000, while the two grandchildren (B1 and B2) would each receive $50,000. (As a rule, insurance companies will not make payments to minors, so the funds would be disbursed to a custodian/guardian, such as the grandchildren’s mother.)
In most instances, life insurance policies are long-term financial agreements. Over time, births, deaths, divorce, and other factors could dramatically change the beneficiary intentions of the policy owner. And without regular reviews of these policy details, the changes in life could result in unintended beneficiaries; some might be included, others left out.
By Elozor M. Preil
