Many employers offer company paid group life insurance to their employees. The ultimate goal? Protect the financial future of the employee’s loved ones. While this goal may sound straightforward, designating beneficiaries and ensuring that the policy pays according to an employee’s wishes is not as easy as it sounds. Improper beneficiary designation can lead to lengthy delays in payouts or benefits not being paid out as intended. Employees need to take the time to understand and carefully designate beneficiaries to avoid any lack of clarity or extended delay at the time of death.
Understanding Beneficiary Designations
Employees can name any person or entity (except their own employer) as a beneficiary, including family members, friends, trusts or charities. Accurate documentation ensures group life insurance benefits are paid as intended.
Beneficiary designations fall into two categories:
Primary beneficiaries: A primary beneficiary is the first person or entity that the employee chooses to receive life insurance benefits. If more than one primary beneficiary is named, the employee must specify the percentage of the benefit (not a dollar amount) they want paid to each. In the event that a primary beneficiary is disqualified or dies before the employee, his/her percentage of the benefit will be paid to the remaining primary beneficiaries.
Contingent (or secondary) beneficiaries: A contingent beneficiary is the person or entity that the employee chooses to receive benefits if no primary beneficiaries are qualified or alive at the time the employee dies. If more than one is named, employees must specify the percentage of the benefit they want paid to each. In the event that a contingent beneficiary is disqualified or dies before the employee, his/her percentage of the benefit will be paid to the remaining contingents.
Additional beneficiary designations are available; however, employees are strongly encouraged to seek professional advice before proceeding. These designations include:
Minor beneficiaries: If the beneficiary(ies) is a minor, the carrier cannot pay directly to the beneficiary(ies) as they normally would. Instead, there may be options for payment that may vary according to the state where the beneficiary(ies) lives, including:
- Uniform Transfer to Minors Act (UTMA) – Most states have passed UTMA legislation, which allows carriers to make payment to the custodian of the minor beneficiary if the benefit is under a certain statutory amount. The custodian is normally a parent, grandparent, adult relative, or court appointed representative. The beneficiary may select the custodian, provided no court has already done so. If the beneficiary has a court-appointed guardian, this option will not apply. If this option is selected, a check will be made payable to the custodian on behalf of the minor beneficiary.
- Payment to Court Appointed Guardian – Another option is for the carrier to pay the life insurance benefit to a court appointed guardian of the minor’s estate. In most states, the surviving parent does not automatically have the right to receive or control any part of the estate or assets of the minor beneficiary. In order to receive or control the estate or assets of the minor beneficiary, the surviving parent (or other guardian of the minor child as a person) must be specifically named as guardian of the minor’s estate. Court costs are involved in obtaining guardianship papers and states vary in what is required and who may apply for guardianship.
- Interest Bearing Account until the age of Majority – In this option, the carrier places the proceeds in an account with a guaranteed rate of interest maintained by the carrier until the minor beneficiary attains the age of majority. At that time, the proceeds are paid directly to the beneficiary. If during this time a guardian of the minor beneficiary’s estate is appointed, the proceeds will be payable to the guardian of the estate. If the minor beneficiary does not survive to the age of majority, proceeds will be paid to the minor beneficiary’s estate.
Trusts: Employees may elect to designate trusts as beneficiaries. Benefits will be released to the trustee for distribution according to the trust’s guidelines when the exact name of the trust, along with the accompanying Tax ID number, is listed as the beneficiary.
Estates: When an estate is named as beneficiary, the insurer will release benefits to the court appointed representative of the estate, such as an executor or administrator.
Absolute assignments: An “absolute assignment” transfers all rights, title and interest of a life insurance policy from the employee to an assigned individual or entity. After the assignment, the employee may no longer exercise any options on the policy, including changing amounts or beneficiaries or voluntarily canceling the insurance. This is typically done for estate planning purposes or to fulfill obligations under a divorce or settlement.
Without proper beneficiary designations, an employee’s death benefit can sometimes be left to chance. If there is no beneficiary on file, death benefits are typically paid according to the group policy provisions.
Life insurance claims can quickly become complex when beneficiary designations are incomplete, inaccurate or out of date. As an employee benefit, group life insurance is intended to help employees protect the financial futures of their family members, individuals or organizations they care about. Be sure to review your beneficiary designations annually to ensure your life insurance benefit is paid out according to your wishes.