Beneficiary Designations
Proper beneficiary designation is critical to ensuring death benefits are paid as intended. Understanding the various types of designations and their implications is essential for the exam.
Levels of Beneficiaries
Primary Beneficiary
The primary beneficiary is the first in line to receive the death benefit when the insured dies.
| Feature | Description |
|---|---|
| Priority | First to receive benefit |
| Requirement | Must survive insured to receive benefit |
| Typical designees | Spouse, children, trust |
Contingent (Secondary) Beneficiary
The contingent beneficiary (also called secondary beneficiary) receives the death benefit only if the primary beneficiary cannot.
| Feature | Description |
|---|---|
| Priority | Second in line |
| Receives benefit when | Primary beneficiary predeceases insured or cannot receive |
| Importance | Provides backup designation |
Tertiary Beneficiary
The tertiary beneficiary is third in line, receiving benefits only if both primary and contingent beneficiaries cannot.
Example of Beneficiary Order
| Level | Beneficiary | Receives When |
|---|---|---|
| Primary | Spouse | If living at insured's death |
| Contingent | Children | If spouse predeceased |
| Tertiary | Parents | If spouse and children predeceased |
Revocable vs. Irrevocable Beneficiaries
Revocable Beneficiary
A revocable beneficiary can be changed by the policy owner at any time without the beneficiary's consent.
| Feature | Revocable |
|---|---|
| Can be changed | Yes, anytime |
| Beneficiary consent | Not required |
| Default | Most designations are revocable |
| Owner's control | Full control retained |
Irrevocable Beneficiary
An irrevocable beneficiary cannot be changed without the beneficiary's written consent.
| Feature | Irrevocable |
|---|---|
| Can be changed | Only with beneficiary's consent |
| Beneficiary's rights | Has vested interest in policy |
| Policy changes | Many changes require consent |
| Common uses | Divorce settlements, business agreements |
Changes Requiring Irrevocable Beneficiary Consent
| Action | Consent Required? |
|---|---|
| Change beneficiary | Yes |
| Take policy loan | Usually yes |
| Assign policy | Yes |
| Surrender policy | Yes |
| Change death benefit | May require consent |
Exam Tip: An irrevocable beneficiary has a "vested interest" in the policy. The owner cannot make significant changes without the beneficiary's approval.
Class Designations
A class designation names a group rather than specific individuals.
Examples of Class Designations
| Designation | Who Receives |
|---|---|
| "My children" | All living children at death |
| "My grandchildren" | All living grandchildren at death |
| "My siblings" | All living brothers and sisters |
Advantages and Disadvantages
| Factor | Impact |
|---|---|
| Advantage | Automatically includes new members |
| Advantage | Excludes deceased members |
| Disadvantage | May be ambiguous |
| Disadvantage | May include/exclude unintended people |
Clarifying Class Designations
| Issue | Clarification |
|---|---|
| Stepchildren | "My children" may or may not include stepchildren |
| Adopted children | Usually included as children |
| Half-siblings | May or may not be included |
| Deceased member's share | Per stirpes or per capita? |
Per Stirpes vs. Per Capita
When a beneficiary predeceases the insured, the distribution method determines who receives that share.
Per Stirpes
Per stirpes (Latin for "by the branch") means a deceased beneficiary's share goes to their descendants.
| Situation | Distribution |
|---|---|
| Child A alive | Receives their share |
| Child B deceased, has children | Child B's children share that portion |
| Child C deceased, no children | Share divided among A and B's descendants |
Per Capita
Per capita (Latin for "by the head") means a deceased beneficiary's share is divided equally among the surviving beneficiaries.
| Situation | Distribution |
|---|---|
| Child A alive | Shares with surviving siblings |
| Child B deceased | Share goes to Child A (and C if alive) |
| Grandchildren | Receive nothing unless parents all deceased |
Comparison Example
Insured has 3 children. Child B predeceased with 2 children. Death benefit is $300,000.
| Method | Child A | Child B's Kids | Child C |
|---|---|---|---|
| Per stirpes | $100,000 | $50,000 each | $100,000 |
| Per capita | $150,000 | $0 | $150,000 |
Exam Tip: Per stirpes keeps the share in the deceased beneficiary's "branch" (their descendants). Per capita redistributes among survivors only.
Common Disaster Clause
A common disaster clause (also called a survivorship clause) addresses what happens when the insured and beneficiary die in the same accident.
Purpose
Without this clause:
- If beneficiary survives even briefly, benefit goes to beneficiary's estate
- May result in unintended distribution
- May create tax complications
How It Works
| Provision | Effect |
|---|---|
| Survivorship period | Beneficiary must survive insured by specified period (30-60 days) |
| If beneficiary dies in period | Treated as if beneficiary predeceased |
| Result | Benefit goes to contingent beneficiary |
Example
Policy has common disaster clause with 30-day survivorship requirement:
- Insured and spouse die in auto accident
- Spouse (primary beneficiary) survives 10 days
- Spouse is treated as having predeceased
- Death benefit goes to contingent beneficiary (children)
Simultaneous Death (Uniform Simultaneous Death Act)
The Uniform Simultaneous Death Act provides rules when it cannot be determined who died first.
Rule
If it cannot be proven that the beneficiary survived the insured:
- The insured is presumed to have survived the beneficiary
- The death benefit is paid as if the beneficiary predeceased
- Typically goes to contingent beneficiary
Naming the Estate as Beneficiary
Naming "My Estate" as beneficiary has disadvantages:
| Disadvantage | Impact |
|---|---|
| Probate | Proceeds subject to probate |
| Creditors | Proceeds may be available to creditors |
| Delay | Distribution delayed by probate process |
| Costs | Probate fees and costs apply |
| Privacy | Becomes public record |
Exam Tip: Naming the estate as beneficiary is generally not recommended because proceeds become subject to probate and creditors' claims.
Key Takeaways
- Primary beneficiary receives first; contingent receives if primary cannot
- Revocable beneficiaries can be changed; irrevocable require consent
- Class designations name groups (e.g., "my children")
- Per stirpes: Deceased beneficiary's share goes to their descendants
- Per capita: Deceased beneficiary's share goes to surviving beneficiaries
- Common disaster clause: Beneficiary must survive specified period
- Naming estate: Generally not recommended due to probate and creditor issues
Per stirpes distribution means:
An irrevocable beneficiary designation means:
A common disaster clause typically requires:
Naming "My Estate" as beneficiary is generally NOT recommended because:
10.4 Policy Exclusions
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