6.2 Beneficiaries: Designations, Per Stirpes/Capita, Common Disaster

The Beneficiary Designation

A beneficiary is the person or entity that receives the death benefit when the insured dies. The policyowner names the beneficiary and, unless the designation is irrevocable, may change it at any time. Beneficiary rules are tested heavily because they determine who is paid, in what share, and whether proceeds bypass probate.

Death proceeds paid to a named living beneficiary generally pass outside probate and are received income-tax-free. If no beneficiary survives the insured, proceeds default to the insured's estate, where they may be exposed to creditors and probate delay.

Classes of Beneficiaries

Beneficiaries are organized into classes that establish payment order:

• Primary beneficiary receives the proceeds first if living at the insured's death.
• Contingent (secondary) beneficiary receives proceeds only if no primary beneficiary survives.
• Tertiary beneficiary is a third level used when neither primary nor contingent survives.

Within a class, named beneficiaries normally share equally unless the owner specifies otherwise.

Trap: With an irrevocable beneficiary, the owner cannot change the beneficiary, take a loan, surrender, or assign the policy without the beneficiary's written consent.

Specific vs. Class Designations

A specific designation names individuals: "my children Ann and Ben, equally." A class designation names a group: "my children" without listing names, which captures children born later and is interpreted at the insured's death.

• Per capita means "by head." Proceeds are split equally among the named, living beneficiaries of that level. A deceased beneficiary's share is redistributed among the surviving same-level beneficiaries.
• Per stirpes means "by branch." A deceased beneficiary's share passes down to that beneficiary's own children (descendants), keeping the share within the family branch.

Understanding the difference is critical when a beneficiary predeceases the insured.

Worked Example: Per Stirpes vs. Per Capita

An owner names three children, Ann, Ben, and Cara, as equal primary beneficiaries on a $300,000 policy. Ben dies before the insured, leaving two children (the insured's grandchildren).

• Per capita: Ben's share is dropped and the $300,000 is split among the surviving same-level beneficiaries, Ann and Cara. Each receives $150,000; Ben's children receive nothing.
• Per stirpes: The estate is split into three branches of $100,000. Ann gets $100,000, Cara gets $100,000, and Ben's branch ($100,000) passes to his two children, who split it $50,000 each.

This single fact pattern is a classic exam question; memorize that per stirpes follows the bloodline down a branch while per capita stays at the surviving head count.

Common Disaster and the Uniform Simultaneous Death Act

When the insured and the primary beneficiary die in the same accident and it is unclear who died first, payment order is uncertain. Two tools resolve this:

• The Uniform Simultaneous Death Act presumes the insured survived the beneficiary when the order of death cannot be determined. Proceeds therefore pass to the contingent beneficiary (or the estate), not through the deceased primary beneficiary's estate.
• A common disaster clause (also called a time clause) requires the beneficiary to survive the insured by a stated period, often 30 to 60 days, to collect. If the beneficiary dies within that window, proceeds go to the contingent beneficiary.

Both devices keep proceeds out of a deceased beneficiary's estate, protecting the owner's true intent and avoiding double probate.

Spendthrift clause note: A spendthrift clause bars a beneficiary from assigning or borrowing against installment proceeds and shields them from the beneficiary's creditors, which is why it pairs well with deferred settlement options.

Minor Beneficiaries and Special Designations

Naming a minor as beneficiary creates a problem: insurers will not pay a death benefit directly to a minor, who cannot give legal release. The proceeds are typically held until a guardian is appointed or a custodian under the Uniform Transfers to Minors Act receives them, which can delay payment and add cost. Owners often solve this with a trust as beneficiary or by electing a guardian in the designation.

Other tested designation forms include:

• Estate as beneficiary, which exposes proceeds to probate and the insured's creditors.
• Trust as beneficiary, which allows controlled distribution and avoids probate.
• Class designation such as "surviving children," which adjusts to births and deaths automatically.

Trap: Naming the estate (or failing to name any surviving beneficiary) drags proceeds through probate and can subject them to estate creditors, undoing the bypass that a named living beneficiary provides.

Revocable vs. Irrevocable and Spendthrift

A revocable beneficiary can be changed by the owner at any time without consent. An irrevocable beneficiary has a vested interest — the owner cannot change the designation, take a loan, or surrender the policy without the beneficiary's written consent. A spendthrift clause protects proceeds left under a settlement option from the beneficiary's creditors and bars the beneficiary from commuting or assigning future payments, useful when leaving money to a financially imprudent heir.

Minor Beneficiaries and the Uniform Simultaneous Death Act

Insurers will not pay proceeds directly to a minor; a guardian or trust must be named, or the court appoints one, delaying payment. The Uniform Simultaneous Death Act presumes, when insured and primary beneficiary die together with no clear order, that the insured survived, so proceeds pass to the contingent beneficiary or estate. The common disaster clause and a survivorship period (e.g., the beneficiary must survive 15-30 days) reinforce this and prevent proceeds from cycling through a deceased beneficiary's estate.