Can Life Insurance Go to the Wrong Beneficiary?
The saying “get your affairs in order” refers to a person’s planning for what happens to their assets after they pass away or lose capacity to make sound decisions. Even so, many people do not have wills or life insurance policies, the two main tools for doing this.
Estate planning is supposed to protect the deceased’s assets for the beneficiaries. Yet even if done carefully, unforeseen circumstances and unintentional mistakes can cause disputes, headaches, and cases where the proceeds end up going to the wrong beneficiary.
An Insurance Issue
Life insurance policies are made directly between the insured person and the insurance company and are separate from a will or a trust. If there are no problems with the policies, the assets are passed straight to the beneficiaries.
Any challenges to this are dealt with separately through legal proceedings. Since life insurance settlements do not automatically go through a probate process, the only way to contest the beneficiary designation is in court. This can be a challenging undertaking, but there can be sufficient grounds to make a case.
Forgery, Fraud, and Deceit
Falsifying documents or deceiving the insured person into signing something that they do not fully understand are examples of forgery and fraud. False signatures and paperwork can be used as attempts to change beneficiaries.
When a third party uses threats, coercion and manipulation, the insured could become frightened or confused and agree to terms that are signed under undue influence. Physically and mentally challenged policy holders, such as dementia patients, might not understand what they are signing.
It would have to be proven that the insured did not know what they were doing, or that that they were forced into signing.
Beneficiaries can be blindsided if they learn that the insured had another contract with a third party that is separate from the life insurance policy.
For example, divorce agreements can specify that the ex-spouse waive their beneficiary rights and/or name the children as beneficiaries. This can cause thorny legal disputes; if the children are minors, a court-appointed guardian must manage the assets until the children are of legal age.
Thoughtfully Planned Life Insurance
Not all beneficiary designation problems can be prevented, but there are methods that are designed to keep these affairs in better order. One strategy is an ILIT, or irrevocable life insurance trust. The ILIT can purchase and own the insurance policy; it can also be designated as the beneficiary. ILITs are managed by trustees, who administer the assets after the insured has passed away.
Designating the estate as beneficiary could incur high state inheritance taxes, expose the funds to creditors, and cause other delays in transferring the money to beneficiaries. It may make more sense to designate a trust as the beneficiary, with a reliable manager that will be instructed by the insured ahead of time, regarding asset distribution.
Once the paperwork is properly completed, it should be reviewed periodically, and especially after any life changes, such as divorce or the untimely passing of other family members.
Long Island Elder Law Litigation Lawyers at Korsinsky & Klein, LLP Specialize in Asset Protection
Life insurance policies are designed to help beneficiaries; but in many cases the assets end up in the wrong place. If you need guidance with a life insurance beneficiary dispute, contact an experienced Long Island elder law litigation lawyer at Korsinsky & Klein, LLP today for a free consultation. Fill out an online form or call 212-495-8133. We proudly serve clients across Manhattan, Long Island, and Westchester, New York.