6.2 Beneficiaries: Designations, Per Stirpes/Capita, Common Disaster
Key Takeaways
- Beneficiaries are ranked primary, contingent, then tertiary; if none survive, proceeds default to the policyowner's estate and enter probate.
- An irrevocable beneficiary must give written consent before the owner can change the designation, borrow, surrender, or assign the policy.
- Per stirpes sends a deceased beneficiary's share down to descendants; per capita splits only among surviving named beneficiaries.
- The Uniform Simultaneous Death Act and a common disaster clause keep proceeds from passing through a beneficiary's estate when deaths are simultaneous or close in time.
- Naming a minor directly stalls payment until a guardian or UTMA custodian is appointed; trusts or custodians avoid the delay.
Who Receives the Death Benefit
The beneficiary is the person or entity that receives the policy's death proceeds. The policyowner names the beneficiary and, unless restricted, may change that designation. Beneficiary rules are heavily tested because the exam wants you to apply ordering rules to fact patterns: who survives, who predeceases, and how proceeds split among descendants.
Death proceeds paid to a named living beneficiary pass outside probate and are generally income-tax-free to the beneficiary. If the proceeds are payable to the estate, they enter probate, may be exposed to creditors, and can increase the taxable estate.
Classes of Beneficiaries
Beneficiaries are organized by priority class:
| Class | Meaning | When they collect |
|---|---|---|
| Primary | First in line | Living at insured's death |
| Contingent (secondary) | Next in line | Primary predeceased or died simultaneously |
| Tertiary | Third in line | Primary and contingent both gone |
If no named beneficiary survives, proceeds default to the policyowner's estate.
Revocable vs. irrevocable:
- A revocable beneficiary can be changed by the owner at any time without consent.
- An irrevocable beneficiary has a vested right; the owner needs the beneficiary's written consent to change the designation, take a policy loan, surrender for cash, or assign the policy.
Per Stirpes vs. Per Capita
These Latin terms control how proceeds split when a beneficiary dies before the insured and that beneficiary has children.
- Per stirpes ("by the branch"): a deceased beneficiary's share flows down to their descendants.
- Per capita ("by the head"): proceeds are split equally among the surviving named beneficiaries at that level; a deceased beneficiary's children get nothing through that branch.
Worked scenario — three children equally, one predeceases leaving two kids:
| Method | Surviving Child A | Surviving Child B | Deceased Child C's 2 kids |
|---|---|---|---|
| Per stirpes | 1/3 | 1/3 | 1/3 split = 1/6 each |
| Per capita | 1/2 | 1/2 | $0 |
For a $300,000 benefit, per stirpes gives each grandchild $50,000; per capita gives each surviving child $150,000 and the grandchildren nothing.
Common Disaster and the Uniform Simultaneous Death Act
When the insured and the primary beneficiary die in the same event and the order of death is unclear, two tools resolve the payout.
- The Uniform Simultaneous Death Act (USDA) presumes the insured survived the beneficiary, so proceeds pass to the contingent beneficiary (or the estate) rather than through the deceased beneficiary's estate.
- A Common Disaster clause (a Uniform Simultaneous Death provision in the policy) requires the beneficiary to survive the insured by a stated period, often 30 days, to collect; otherwise the contingent beneficiary takes.
Both devices keep proceeds away from a dead beneficiary's estate and probate. They protect the owner's intent to benefit a living person, and they avoid double probate administration.
Minor and Special Beneficiary Issues
Naming a minor directly is a common trap: insurers cannot pay proceeds outright to a minor, so payment stalls until a guardian or custodian under the Uniform Transfers to Minors Act (UTMA) is appointed. Better planning names a trust or custodian.
Other tested points:
- A specific beneficiary (named individual) is preferred over a class designation ("my children") only when clarity matters; class designations let new children share automatically.
- The Spendthrift clause protects proceeds left with the insurer from a beneficiary's creditors until paid out.
- Proceeds payable to an irrevocable beneficiary are shielded from the owner's later changes.
A policyowner names her three children as equal primary beneficiaries, per stirpes. One child dies before the insured, leaving two children of his own. On the insured's death, how is a $300,000 benefit distributed?
The insured and the primary beneficiary die in the same car accident, and it cannot be determined who died first. Under the Uniform Simultaneous Death Act, what happens to the proceeds?
Worked Scenario: Per Stirpes vs. Per Capita Distribution
The distribution method changes who gets what when a beneficiary predeceases the insured.
Setup: insured names three children, A, B, and C, each 1/3, per stirpes. Child C dies first, leaving two children (grandchildren of the insured). On a $300,000 benefit:
- Per stirpes (by branch): A gets $100,000, B gets $100,000, and C's $100,000 share passes down C's branch, split between C's two children ($50,000 each).
- Per capita (by head): if instead distribution were per capita at the surviving level, the living takers share equally by head.
If a beneficiary's share has no surviving heirs and no contingent beneficiary exists, that share typically goes to the surviving named beneficiaries or, failing all, to the insured's estate - where it becomes subject to probate and creditors. Naming a contingent beneficiary avoids that outcome.