A primer on beneficiariesArticle added by Scott Wheeler on February 9, 2010
Scott Wheeler

Scott Wheeler

Joined: June 27, 2008

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It's best to review beneficiary designations with your clients on a regular basis (at least every couple years) to make sure that their desires are carried out once they pass away.

When an annuity or insurance policy is first established, the beneficiary is typically a family member, spouse, or party that would be in worse financial condition if the owner were to die. Once the contract is issued and in force, however, the owner can make a change at will.

For situations with questionable claims of insurable interest (for example, some domestic partner situations) it's possible to make the "Estate of the Owner/Insured" the beneficiary and then change it to the party desired after the policy has been issued.

Common beneficiary designations

Having a working knowledge of proper beneficiary designation terms is important. It allows for concise, industry-accepted understanding of intent. Some commonly used beneficiary designations are listed below:
  • "Per Stirpes:" Any deceased child's share will be split equally among the children of the deceased child.

  • "Per Capita:" Every beneficiary's share will be equal. Any deceased child's children's share will be equal to each surviving child's share. Grandchildren with surviving parents get nothing.

  • "Equally or Survivor:" Deceased children's shares are split equally amongst the surviving siblings, disinheriting the children born to the deceased child.

  • "Children of the lawful marriage of the insured with ____:"Keeps the benefits from any other children.

  • If any of said beneficiaries is a minor, said minors share to be paid to:" ____, as custodian for the benefit of said minor child": Keeps the proceeds out of court. The custodian has total control over the use of the funds.

  • "____ if living, otherwise____:"Can be used to name a contingent or tertiary beneficiary if the carrier's forms don't provide for them.
Avoid beneficiary designations problems

Many common problems can be avoided using the designations above and by listing each beneficiary's birthday, Social Security number, and respective share. This information can prevent the following issues:
    1. Children born outside of the marriage coming forward to claim

    2. Dollar amount bequests that total more or less than the amount available

    3. Children of deceased beneficiaries receiving/not receiving desired funds

    4. Minors need a named custodian to receive money and avoid court proceedings
Each company and product may have different rules about who gets the money if the beneficiary designation is incomplete or unclear. It is important to understand the company defaults in case this section is not completed.

Also, if no distribution percentage is given, most companies will designate beneficiaries of the same class (primary, contingent, and tertiary) to share "equally". Most companies don't define whether this means equally or survivor, per stirpes or per capita.

Keep in mind, simultaneous death provisions define what happens if the insured and beneficiary die at approximately the same time. Most carriers specify that if the beneficiary dies 30 or fewer days after the insured, the funds pass on to the contingent beneficiary.

Some states have laws that change the beneficiary automatically in situations such as divorce. It is important for the agent to know their state laws and situations where this may happen, as this may not be in the owner's interest or desire.

Annuity-specific information to keep in mind

Annuities can be either "owner-driven" or "annuitant-driven." An owner-driven contract (most common) will pay to the beneficiary when the owner dies. If the owner and annuitant are different and the annuitant dies, the owner is generally named as the new annuitant.

By contrast, an annuitant-driven contract will pay the beneficiary when the annuitant dies. If the owner and annuitant are different and the owner dies, the contract would be taken over by the contingent owner or go to the owner's estate.

Keys to success
  • Client's family. Know the names, birthdates, Social Security numbers and specific needs of each family member.

  • Client's desires. Does your client want to leave money to a charity? Are there any beneficiaries outside of the family?

  • Past marriages. Know where your client stands on leaving funds to children of past marriages, providing for former spouses, and if funds left to beneficiaries should be restricted in some manner.
Potential hazards
  • Improperly designated annuitant-driven contracts. If the owner of an annuitant-driven contract is not the beneficiary or the annuitant, they will lose control of the contract upon the annuitant's death and give the beneficiary a gift (along with gift tax consequences).

  • No contingent owner on annuitant-driven contract. This will subject the entire contract to probate should the owner die prior to the annuitant.

  • Unclear identification of beneficiaries. Not using full names, Social Security numbers, and birthdates could cause delays at claim time.

  • Not having contingent beneficiaries. This could present big problems if the beneficiary dies before the owner/insured or if the beneficiary disclaims the proceeds.
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