Who Can Collect a Life Insurance Payout?

Only a judge can change the provisions of a life insurance contract.

Life insurance policies pay a specified sum of money to your heirs if you die within the scope of the contract terms. Beneficiaries can be changed at any time by the policy owner, and there is no limit to the number of recipients a policy can have. Insurance carriers will only pay death benefit proceeds to those individuals listed as beneficiaries, unless ordered by a court to proceed in another manner.

Primary Beneficiaries

The primary beneficiary is the policy owner's first choice recipient, and policy proceeds will be distributed to primary beneficiaries regardless of the presence of contingents. If multiple primary beneficiaries were listed, but at the time of the insured person's death they are not all still living, the share allocated to the deceased primary beneficiary will be proportionately split between the remaining primary recipients.

Contingent Beneficiaries

Policy owners may list contingent beneficiaries, as secondary choices, to receive death benefit proceeds if the primary beneficiaries have died, or are otherwise unable or unwilling to receive the life insurance payout. Contingent beneficiaries will not receive life insurance proceeds if any primary beneficiary is still alive.

Minors as Beneficiaries

One of the most complicated and problematic situations arises when an insured person's only beneficiaries are minor children. Despite the fact that the children are legitimately listed as the intended recipients of the policy proceeds, no insurance carrier can distribute funds to a minor. If a formal estate plan does not exist that specifically addresses the situation, the matter is brought to the courts. A judge will choose a guardian to oversee the account and manage the funds until the minor is of legal age to take control. The resulting situation could become disastrous for everyone involved, as the appointed guardian may be a complete stranger, not to mention the danger of giving large sums of money to an 18-year-old.

Trusts

Trusts are often used to prevent the complicated and overwhelming situations that may arise if an insured person's only beneficiaries are minor children. A trust, as a formal entity, can be listed as either a primary or contingent beneficiary. The provisions of the trust, specifically the time and manner in which children may receive the money, can be decided and arranged in advance. Additionally, a guardian, one who is not a complete stranger, can be chosen to ensure that the parent's wishes are granted.

Disputing Beneficiaries

Life insurance carriers are obligated to pay death benefit proceeds to listed beneficiaries in the amounts and percentages originally detailed by the policy owner. Carriers do not have the authority to selectively choose which beneficiaries to pay nor permission to change the terms of the beneficiary elections. Only a court order can compel an insurance company to pay out proceeds in a manner other than what was detailed by the policy owner. Disputing life insurance beneficiaries is a difficult, expensive, time-consuming and often unsuccessful process. Life insurance policies are legal contracts between the policy owner and the carrier, and changing the terms of that contract requires clear demonstration to a court that beneficiary designations were changed or altered under duress or coercion.

References

• New York Life: Don't Name Minors As Beneficiaries
• Insure.com: Can You Dispute a Life Insurance Beneficiary?