The insured party passes away. Multiple parties then claim they are entitled to the life insurance benefits. Read on to find out about the different types of life insurance disputes, how an insurance company determines who is ultimately entitled to the benefits, what you should do if you find yourself embroiled in a beneficiary dispute, and how to avoid a beneficiary dispute.
Two Common Types of Life Insurance Disputes
1. Former Spouses Claim to Be the Beneficiary
This is common when an ex-spouse remains the named beneficiary on a life insurance policy. If the insured neglected to change the beneficiary after a divorce or if the ex-spouse’s designation as beneficiary was part of the divorce decree, the ex-spouse may be entitled to the life insurance benefits.
This depends entirely upon the type of life insurance policy and the state in which the policy was issued – in many states, an ex-spouse may not be entitled to benefits despite being named a beneficiary, and in others, a spouse may be entitled to benefits even if not named.
State law will determine whether an ex-spouse is the beneficiary.
Post-divorce life insurance beneficiary rules vary by state. About half of all states maintain a “revocation-on-divorce” statute, which provides that divorce effectively removes an ex-spouse as a beneficiary. These statutes may be overridden if:
● the insured re-designates their ex-spouse as the beneficiary, or;
● if the divorce decree states that an ex-spouse will remain the beneficiary.
These situations occur because life insurance is sometimes used as a form of alimony or as financial security for any children of the marriage.
Community Property States
If no revocation-on-divorce statue exists in your jurisdiction, a spouse may still recover if the policy was issued in a community property state. In community property states, all property acquired during the marriage is owned equally by both spouses – including life insurance.
Under a term life policy, a spouse is often entitled to one-half of the death benefit because the entire policy is considered community property. Under a whole life policy, the current spouse is entitled to benefits according to the percentage of premiums paid with community funds.
Policies under ERISA
If the life insurance policy was obtained through the insured’s employer it is governed by the federal Employee Retirement and Income Security Act of 1974 (ERISA) which states that the most recent validly-named beneficiary is the rightful claimant. This means that an ex-spouse who remains the designated beneficiary on a policy will receive the proceeds, regardless of the insured’s intent. However, if the insured tried to change their beneficiary designation at any point, other individuals may still have a claim on the policy.
If the insured’s policy originated under their employer and was converted to an individual policy, the rules governing beneficiary disputes varies greatly by jurisdiction. If you find yourself in these circumstances and believe you have a claim, you will need the help of an experienced beneficiary attorney to evaluate your situation.
2. Competing Claims by Siblings, Step-siblings, and Others
Another common beneficiary dispute occurs when the insured has children from multiple marriages or marries someone with children from a previous marriage. Often, an insured parent intends to make all his or her children beneficiaries but neglects to add children to the policy as time passes.
Do these unnamed children have a claim? Again, state laws vary, but most states will only allow a validly named beneficiary to collect life insurance proceeds.
In short, someone other than the named beneficiary could have a valid claim, but only if there is clear evidence of the insured’s intent to name another beneficiary. Evidence of the insured’s intent may exist if, for example, the insured completed and mailed a beneficiary change form, but forgot to sign it, or signed it, but forgot to mail it!
These things can happen and when they do, litigation is the only way for the court to get the information it needs to determine the intent of the insured.
How Will the Insurance Company Handle Competing Claims?
When multiple parties claim the right to receive the same benefits, how does an insurance company determine who is entitled to those benefits?
The answer is, an insurance company will likely not determine who is entitled to the benefits when there is a beneficiary dispute. Rather, if more than one party claims to be the legal beneficiary of a policy, a life insurance company will likely bring an interpleader action in court. This means that an insurance company will deposit the policy benefits into an account controlled by the court until the rightful beneficiary is decided.
By opening an interpleader action, the insurance company asks the court to decide who is entitled to the benefits. Such actions are resolved in one of the following ways:
● litigation (the parties will make their cases and the court will decide who is the rightful beneficiary), or;
● settlement (the parties agree upon the amounts to which they are each entitled with the help of their attorneys).
After the dispute is resolved, the life insurance benefits are distributed according to what the court or the parties decided.
How to Avoid Life Insurance Disputes
The best way to avoid a beneficiary dispute is to ensure that you and your loved ones regularly review your life insurance policies and your beneficiary designations. You should keep in touch with your issuing agent and establish a plan to periodically review your policy.
Most importantly, you should be sure to review and amend your policies accordingly after important events such as marriage, the birth or adoption of a child, and divorce.
About the author:
Mr. Boonswang is a litigation lawyer based in Philadelphia, PA, having graduated from the University of Pennsylvania and the Villanova University Charles Widger School of Law. Mr. Boonswang is a member of the Philadelphia Bar Association, the Pennsylvania Bar Association, the American Bar Association, and the Union League of Philadelphia.
In 2003, Mr. Boonswang founded his own practice prosecuting life insurance claims and catastrophic injury cases, and his firm has since recovered tens of millions of dollars on behalf of his clients.
Mr. Boonswang maintains a popular and active blog on all aspects of life insurance law and policy.