Category: Life Insurance Claims

When must an insurable interest exist for a life insurance contract to be valid?

When someone purchases life insurance, he or she must have an “insurable interest” in the insured. This means that the policyholder, i.e. the person who owns the policy and names the beneficiary or beneficiaries, will suffer financial loss if the insured dies unexpectedly. It is important to remember that this sort of relationship only needs to exist between the policyholder and the insured, not the beneficiary. Beneficiaries are not required to have any insurable interest in the insured (see our previous blog post). There are many situations in which an insurable interest exists, including:

  • A spouse or family member
  • A financially dependent ex-spouse
  • An employer or business partner (if designated as “key personnel”)
  • A creditor

In each of these examples, the policyholder is financially or emotionally “interested” in the well-being of the insured. If insurable interest were not a requirement for taking out life insurance, strangers could essentially gamble on the lives of others. A policyholder without substantial interest in the life of the insured would be incentivized to cause harm and profit from an early death benefit.

When Must An Insurable Interest Exist in a Life Insurance Policy?

An insurable interest must exist and is a non-negotiable requirement for any form of any insurance, including life insurance. If there is an insufficient insurable interest between the policyholder and the insured, the policy is voided. The legal precedent for insurable interest was solidified in Warnock v. Davis, in which the Supreme Court of the United States asserted that a life insurance policy without insurable interest constitutes a “wager” against the life of the insured. (Warnock v. Davis, 104 U.S. 775)

Many state statutes also include provisions explicitly outlining what constitutes an “insurable interest.” For instance, California Insurance Code § 10110.1 defines insurable interest as “a reasonable expectation of pecuniary advantage through the continued life, health, or bodily safety” of the insured, “or a substantial interest engendered by love and affection in … individuals closely related by blood or law.”

Many investors try to find loopholes to avoid the need for an insurable interest in the insured. They do this by arranging with an individual to pay all the premiums on the individual’s policy on himself or herself with the understanding that, after a few years, the investor will obtain ownership of the policy. This evades the need for an insurable interest because insurable interests are evaluated at the time of the original purchase. Courts are not consistent in deciding whether these policies are legal.

Contesting a life insurance beneficiary designation

Can a Life Insurance Beneficiary Designation Be Contested?

Yes, you can contest a life insurance beneficiary designation and you may be able to sue for life insurance proceeds.

Common reasons to dispute a life insurance beneficiary designation include:

  • the beneficiary designation was forged,
  • the beneficiary designation was fraudulent,
  • the beneficiary designation was made under duress,
  • there were errors on the change of beneficiary form, and
  • state law mandates a beneficiary change.

When a policyholder passes away, his or her life insurance benefit is supposed to go to the named beneficiary, often a spouse, family member, or close friend.

However, when multiple beneficiaries claim the death benefit, things can quickly become complicated under life insurance beneficiary rules. Alleged forgery/fraud, errors on change of beneficiary forms, and specific circumstances regarding divorce are all typical reasons for fighting life insurance beneficiary designations.

Cases involving life insurance beneficiary disputes can be complex and there are always mitigating circumstances. Reach out to our office today to speak with a life insurance dispute lawyer that can guide you through a potentially complex legal situation

Challenging a Life Insurance Beneficiary Designation because there was a Forged Life Insurance Beneficiary Change

Yes, this is one of the most common reasons for life insurance disputes. Where there are allegations of a forged life insurance beneficiary change, typically, a family member may have originally been named beneficiary, yet the policyholder recently designated someone else to receive benefits in their place.

It is important to note that fraudulent changes in beneficiary designation are exceedingly difficult to prove. Anyone can legally be named as a beneficiary by the policyholder regardless of the relationship between both parties.

Still, there are specific circumstances during which a change of beneficiary can be fraudulent.

For instance, written or eyewitness evidence may be able to prove that the change of beneficiary form signed by the policyholder was completed under duress or by someone other than the policyholder.

The policyholder may also have been mentally compromised by dementia, Alzheimer’s, or some other condition, which would invalidate any change in beneficiary. Without concrete evidence, however, allegations of fraud are nearly impossible to prove.

We’ve been able to prove them in certain circumstances.

For example, in one case the insured was bedridden, and her daughter gave herself power of attorney and changed the life insurance beneficiary from our client to herself. We got our client paid.

Challenging a Life Insurance Beneficiary Designation because the Change was Fraudulent

It is important to note that fraudulent changes in beneficiary designation are exceedingly difficult to prove. Anyone can legally be named as a beneficiary by an insured regardless of the relationship between both parties.

Even so, circumstances may prove that a change of beneficiary was fraudulent. For example, if the insured was mentally compromised by dementia, Alzheimer’s, or some other condition when they changed the beneficiary designation, that would invalidate any change in beneficiary.

Challenging a Life Insurance Beneficiary Designation because the Change was Made under Duress

Unfortunately, we have had cases where a caregiver or purported romantic partner manipulated or forced the insured to change the life insurance beneficiary designation to themselves. Any late-in-life beneficiary change, or a last-minute beneficiary change, should be treated as suspicious.

Can someone with power of attorney change a life insurance beneficiary?

Yes, but if that change was not authorized by the insured or was clearly self-serving, that can be challenged. For example, in one of our recent cases, the insured was bedridden. Her daughter gave herself power of attorney and changed the life insurance beneficiary from our client to herself. We got our client paid.

Was there a mistake made on the change of beneficiary form?

Sometimes, the policyholder may intend to change the beneficiary on a life insurance policy but make mistakes when completing or filing the change of beneficiary form. Insurance companies will often reject forms which are incomplete or improperly formatted, in which case the originally designated beneficiary receives the death benefit instead of the “new” one. In contrast to allegations of fraud, invalid forms provide a strong argument in favor of the “new” beneficiary.

What happens when a life insurance policy is contested for these reasons? Example: in Williamson v. Western-Southern Life Ins. Co., the court ruled in favor of the “new” beneficiary since the available evidence suggested that the policyholder intended to enact the change.

Case No. 1098, (Ohio Ct. App., April 19, 1977). Even though there was no official form on file with the insurance company, multiple pieces of corroborating evidence demonstrated that the policyholder wanted to change the beneficiary designation on the policy.

In similar cases, even handwritten notes may be sufficient to prove the policyholder’s intent to change the beneficiary.

We’ve had many cases like this.  In one recent case, our client was married to the insured for many years.

The insured’s daughter was originally the beneficiary of his life insurance policy, but they became estranged during that time, and he filled out and submitted a change of beneficiary form changing the beneficiary to his wife, our client.

He never received notice that the form was deficient in any way, so assumed the change was valid.

After he passed, the insurer asserted that the beneficiary change form was not filled out correctly and wanted to pay the daughter.  We got our client paid.

What Happens When the Life Insurance Beneficiary is an Ex-Spouse?

The law is complex regarding life insurance and divorce. After divorce, an insured will likely want to change the primary beneficiary on their life insurance policy from an ex-spouse to someone else, such as a child or relative. However, there are instances when they might not be able to, or the ex-spouse is removed as beneficiary by operation of state law.

Change of Beneficiary Due to Revocation-Upon-Divorce State Statute

Life insurance beneficiary rules after divorce vary by state. About half of all states maintain a “revocation-on-divorce” statute which provides that divorce effectively removes an ex-spouse as beneficiary. However, a revocation-upon-divorce statute is overridden if:

  • the insured re-designates their ex-spouse as beneficiary, or;
  • if the divorce decree states that an ex-spouse will remain the beneficiary.

Divorce decrees often require that an ex-spouse receiving alimony be the beneficiary of a life insurance policy on the ex-spouse paying the alimony. Whenever a divorce decree specifies the beneficiary of a life insurance policy, the beneficiary becomes “irrevocable.” The insured is then prevented from “revoking” his or her ex-spouse as beneficiary without consent. If the insured does change the beneficiary designation, the former beneficiary has a strong case for a beneficiary dispute.

Change of Life Insurance Beneficiary Designation in Community Property States

In the nine (9) community property states, courts may also enforce “equitable division” of paid-up “whole life” policies regardless of who is the named beneficiary.

If term life insurance premiums were paid with marital assets, the spouse or ex-spouse may be entitled to some or all of the death benefit regardless of who is the named beneficiary.

State law varies on these issues, and federal ERISA law may override state life insurance law if the policy is group life insurance through an employer. Check out the life insurance rules in NY, the life insurance rules in Texas, the life insurance rules in Florida, and the life insurance rules in California.

An example of a life insurance policy after a divorce

Let’s take the example of Mary, Bill, and John.

Mary and Bill married, had children, and divorced. The divorce decree gave full custody of their children to Bill, who receives monthly child support payments from Mary.

The decree also specified that Mary maintain her existing life insurance policy to provide extra financial security for Bill and their children.

Years later, Mary marries John and files a change of beneficiary form with her insurance provider such that John is now listed as beneficiary in place of Bill.

When Mary passes away, the insurance company pays John the death benefit. However, this goes against the divorce decree, which explicitly states that Bill should remain beneficiary.

Bill now may have legal grounds to sue either Mary’s estate or the insurance company since he, not John, was the legally valid beneficiary to Mary’s policy. This is one of the rare circumstances where the life insurance beneficiary be changed after death.

What Do I Do if I am the Named Beneficiary on a Life Insurance Policy and Someone Disputes that?

Challenging a life insurance beneficiary designation can be a complex, difficult, and heavily litigated process. Defending your designation as beneficiary in a life insurance beneficiary dispute is equally difficult. This makes it all the more important to enlist the help of an expert in either case.

We’ve gotten our clients paid in beneficiary disputes. If you are the rightful beneficiary of a life insurance policy yet your claim has been denied, or if you are defending in a beneficiary dispute, don’t hesitate to contact us for help.

Life insurance beneficiary rules in California – 2020 Update

California Beneficiary Laws

For the most part, the process of naming beneficiaries to a life insurance policy is the same across all states. In fact, unless prohibited to do so by law, anyone can be named as beneficiary to a life insurance policy, regardless of whether he or she has any vested interest in the insured.

Complications arise in certain states, such as California, when an insured is married or divorces.

If you’re involved in a dispute regarding a life insurance policy, your can speak with a life insurance beneficiary lawyer at our firm about your case.

What is a Beneficiary in Life Insurance?

A beneficiary to a life insurance policy is someone who was named by the insured person as the person entitled to receive the death benefits upon the death of the insured.

Who Can Change the Beneficiary on a Life Insurance Policy?

Only the policy owner can change a life insurance beneficiary. Life insurance is a private contract between a policy owner and the life insurance company.

Can a Policy Owner Change the Beneficiary on a Life Insurance Policy to Someone other than his Spouse or Children?

Yes. A policy owner has the right to change the named beneficiary or beneficiaries from his spouse or children to anyone else at any time, even if he is married.  However, such a change may or may not be effective according to state law. Most life insurance policies are revocable, meaning the policy owner may change the beneficiary at any time. Some appoint irrevocable beneficiaries, in which case the beneficiary, once designated, cannot be changed.

The Effect of Divorce on Life Insurance Beneficiary Designation in California

Divorce can heavily complicate the process of changing beneficiaries, as explained in our previous post regarding how divorce affects beneficiaries of life insurance policies.

While some states have enacted laws automatically revoking ex-spouses as beneficiaries after divorce, California has not. California, a community property state notorious for having the most complex divorce law in the United States, adds an additional layer of complexity to life insurance and divorce settlements in that if premiums were paid from joint funds, an ex-spouse may be entitled to a payout or death benefits even if not named as beneficiary.

In California, Life Insurance May Be Community Property

California is one of nine (9) community property states in which all property acquired during marriage belongs equally to both parties. After divorce, the policyholder will most likely retain his/her term life policy and be allowed to name new beneficiaries in place of his/her ex-spouse.

However, the community property rule does apply to policies with an accumulated “cash value,” most often in the form of whole life or universal life policies, provided that the policy was purchased during marriage with community funds. In these cases, the policy’s cash value will be divided between the spouses, but ownership of the policy will usually transfer to the spouse listed as beneficiary. This means that the insured’s ex-spouse, who now owns the policy, is obligated to make premium payments and reserves the right to change the beneficiary.

Let’s consider an example. Willy purchased a whole life insurance policy and named his wife, Kate, as beneficiary. After years of paying on the policy and accumulating $10,000 in cash value, Willy and Kate file for divorce. The divorce decree dictates that Willy and Kate each receive $5,000 of the accumulated cash value, while ownership of the policy transfers to Kate. Now, Kate is in charge of making premium payments on the policy and will receive the death benefit if Willy passes away. Willy can no longer change the beneficiary from Kate to someone else. Kate now owns the policy, and only she has the right to change the beneficiary from herself to someone else.

How Accumulated Cash Value is Divided Varies Greatly in California Divorces

It’s important to remember that, while the above situation is often the case in California marital settlement agreements and divorce decrees, the manner in which community life insurance policies are divided is entirely circumstantial. Often, judges will use their own discretion to figure out who owns the policy based on the facts of each individual case. For instance, if the premiums for a whole life policy are fully paid up, then the death benefit, in addition to the cash value, usually gets classified as community property.

Life Insurance Spouse Beneficiary Rules in California

If the insured dies while married, the portion of the death benefit a spouse will receive when the insured named someone other than the spouse as beneficiary will depend upon how premiums were paid, when the policy was purchased, and what type of policy it is.

Is Term Life Insurance Community Property in California?

Maybe. If the insured purchased term life insurance during the marriage and dies while married, the entire policy is considered community property, giving the spouse 50% of the death benefit if income earned during the marriage was used to pay premiums. The other 50% would go to the named beneficiary.

If the insured purchased term life insurance before the marriage, then married and died while married, the spouse would be entitled to the portion of 50% of the death benefit calculated from how much of the policy premiums were paid before the marriage, and how much were paid after.

For example, if Mary buys a term life insurance policy two years before marrying John in California, then dies a year later, and John finds out Mary named her boyfriend Sam as beneficiary, John is entitled to one-third of 50% of the death benefit and Sam would receive the remainder.

Is Permanent Life Insurance Community Property in California?

Maybe. If the policy in question is a form of permanent life insurance, such as whole life or universal life, again, the spouse is entitled to the portion of 50% of the accumulated cash value according to the amount of premiums paid with income earned during the marriage, even if someone else is named beneficiary.

ERISA Supercedes California Life Insurance Beneficiary Law

If the life insurance policy in question was obtained through employment as a benefit, it is governed by the Employee Retirement Income Security Act of 1974 (“ERISA”).  Employment-obtained life insurance policies are not subject to ERISA if the employment involved the government or a church. One provision of ERISA provides that the named beneficiary is always honored, regardless of the insured’s marital status and who the named beneficiary may be.

In states that have laws automatically invalidating an ex-spouse as life insurance beneficiary, if the policy was a benefit of employment, the ex-spouse remains beneficiary if still named. As explained previously, this is not the case in California.

In California, ERISA may dictate that the death benefit is paid to someone other than the spouse despite community property laws. But because beneficiary disputes are expensive, often the named beneficiary and spouse are willing to settle the matter outside of court with the help of their attorneys.

Consult with an Experienced Life Insurance Beneficiary Lawyer

In cases of divorce or death of the insured, or when the policy is governed by ERISA, when the named beneficiary is not the insured’s spouse, disputes often arise over who is the rightful beneficiary. For example, an ex-spouse and a family member of the insured or the girlfriend or boyfriend of the insured may both file claims for the same death benefit. Who gets paid according to California life insurance beneficiary laws?

In these situations insurance companies will frequently pay the named beneficiary without consulting relevant family law. If your claim has been wrongfully denied because you are not the named beneficiary and you are thinking of contesting the life insurance beneficiary designation, it is in your best interest to have a lawyer concentrating in this area evaluate your case.

How to Find a Life Insurance Policy After Death

Life Insurance Companies May Not Contact Beneficiaries

After facing a loved one’s death, life insurance can help provide necessary financial security to pay for funeral expenses and supplement lost income. In most cases, when someone takes out life insurance, he or she lets the named beneficiaries (often family members of the insured) know about it. That way, when the policyholder dies, the beneficiary or beneficiaries will know to file a claim with the life insurance company.

However, policyholders often neglect to discuss their policies with family members. Although the subject may be difficult or personal, failing to let family members know about your life insurance policy can prevent them from obtaining benefits.

In many states, insurance companies are not required to contact the beneficiaries in the event of the policyholder’s death. If your beneficiaries don’t know about the death benefit, then your policy might end up lost and unclaimed. This can create a problem for beneficiaries. How can they find out whether their loved one took out a life insurance policy?

Keep a Copy Of The Death Certificate

To make the process of claiming the death benefit easier, you’ll want to obtain a copy of the death certificate. The local county in which the person passed or the mortuary that managed their funeral will usually have paperwork. This document will provide the life insurance company with the necessary information like the date of the passing and cause of death.

Steps To Uncover a Life Insurance Policy

Looking Through Your Loved One’s Documents

The first step in finding out whether your deceased loved one had a life insurance policy is to look through their records. For instance, bank statements may record monthly premium payments, or the deceased might have received updates from the life insurance company by mail.

Searching through mail, bank statements, contact lists, taxes, etc. can shed light on whether your loved one had life insurance. Additionally, if the deceased had a lawyer, accountant, or close friend oversee his or her finances, there’s a good chance that they would know about any life insurance policies.

Looking Through a Loved One’s Digital Documents

With password encryption, it can be difficult to uncover a file on a computer or hard drive. If the file is located on a server you may be able to contact the email service or cloud storage company with proof of death.

If you do gain access to your loved one’s computer or phone, check their email for the insurer’s name. You can also try checking their cloud storage for records from the life insurance company.    

Check Insurance Databases To Verify a Loved One’s Records

The National Association of Insurance Commissioners (NAIC) maintains a list of state-by-state insurance departments which may keep records of your loved one’s life insurance. They also run a “Policy Locator Service” in which the NAIC will contact insurance companies on your behalf.

The National Association of Unclaimed Property Administrators (NAUPA) uses a similar search tool. You can also pay a company to speak directly to insurance companies and find a missing policy. Policy Inspector is one such example, which charges via a $99 flat fee.

Check To See If The Deceased Has a Group Policy

Some employers may offer life insurance as part of their benefits. In order to obtain the benefits, you will need to reach out to the company’s benefits administrator.

One thing to note is that typically the life insurance policy does not carry over if your loved one left the company. The life insurance policy may also have been offered through the deceased person’s union. If this is the case, a union representative will typically reach out to the beneficiary.       

Do I Really Need To Hire An Attorney For a Life Insurance Case?

Though it may seem like a cut and dry process, if a life insurance company has the opportunity to reject a claim with any plausible excuse, they won’t hesitate to do so. It’s important to always consult an attorney with the skills and experience to get you the benefits you deserve. If you’re experiencing any kind of push back from a life insurance company, call our firm today at 1-855-865-4335

Can an interpleader take money from the winner of a contested insurance policy to pay court costs?

Ideally, the death benefit on a life insurance policy is paid directly from the insurance company to the named beneficiary or beneficiaries. However, disputes frequently arise over who is rightfully entitled to the death benefit. One claimant might allege that the other claimant changed the insured’s beneficiary designation through forged paperwork, or that the named beneficiary is invalid because he or she was responsible for the insured’s death. When multiple parties claim the same death benefit, an insurance company may choose to file an interpleader action.

Defining interpleader

Interpleader” refers to a specific type of lawsuit. Instead of a single claimant suing a single stakeholder, interpleader involves multiple claimants suing one another for rights to the stakeholder’s property. For instance, let’s say that John owned a house. In his will, John dedicated the property to his daughter, Kate, but John also verbally agreed to give the house to his son, Ben. After John dies, the executor of his estate doesn’t know to whom he should give the house. The executor then files an interpleader action, such that Kate and Ben are now litigating against one another for rights to John’s house. This allows the executor to avoid any liability resulting from paying the wrong person.

Similarly, life insurance companies may encounter multiple parties who all claim the same death benefit. The company may choose to file an interpleader action, such that the claimants are fighting against one another instead of against the company. The company is acknowledging it owes the benefit to someone but requests that the court determine the correct party.

Court costs & attorney fees

Generally speaking, when a “neutral stakeholder” such as a life insurance company asks for reimbursement of any court/attorney fees, the court will grant reimbursement by taking from the winning claimant’s death benefit. If a winning interpleader claimant were to receive a $10,000 death benefit, the insurance company (as neutral stakeholder) could subtract $500 in attorney and court fees, leaving $9,500 to the winning claimant. These fees are usually insignificant, as the stakeholder is only filing, drafting, and serving a few documents. However, in a more complex case, the costs may be substantial.

Dealing with competing claims for a life insurance policy’s death benefit can be a complex, heavily litigated process. If your claim has been wrongfully denied, don’t hesitate to contact an experienced life insurance lawyer.

Do life insurance companies have a statute of limitations on payments?

Waiting for a claim to be paid out can be a frustrating process. Generally speaking, claims should be processed and paid out within a month, but this is often not the case. Some claims can take several months before being approved or denied, often being delayed several times by the insurer. Beneficiaries might begin to wonder if they’ll ever get paid, or if there are any deadlines by which the insurance company is legally obligated to respond.

The statute of limitations

The “statute of limitations” is defined as the amount of time under which a dispute can be legally contested. It varies depending on the type of dispute (e.g. personal injury, written contract, oral contract, specific types of insurance, etc.) as well as by state. As applied to life insurance cases, this means that once the statute of limitations has expired, the beneficiary or beneficiaries can no longer file suit against the insurance company.

The statute of limitations does not function as a deadline by which insurance companies must pay out on claims. In life insurance cases, the statute of limitations is designed to help the insurance company, not the beneficiary or beneficiaries. However, many states incentivize prompt payment through regulations.

State-by-state regulations

The vast majority of states have so-called “prompt payment” laws with deadlines and conditions under which claims must be paid. For instance, Michigan’s insurance code dictates that if benefits are not paid within sixty days after the claimant provides proof of loss to the insurer, the insurer will have to pay extra interest. South Carolina, on the other hand, begins accruing interest thirty days after proof of loss. Many states also have regulations requiring payment of claims in a “reasonable” time. Insurance companies that fail to comply with these regulations may be subject to fines or penalties imposed by state departments of insurance.

Although there is no strict “deadline” on life insurance payments, the accrual of interest usually incentivizes insurers to pay out within a month. However, it is not uncommon for life insurance companies to unjustly delay claims as a precursor for denial. If your life insurance claim has been unlawfully delayed, an experienced attorney can help move things along and be prepared in the event that your claim gets denied.

Why would a life insurance policy need probate papers?

Does Life Insurance go through Probate? Is Life Insurance Part of a Deceased Person’s Estate?

Generally speaking, no. Life insurance death benefits are paid out directly from the insurer to the beneficiaries, without going through probate. This is because life insurance is considered separate from the policyholder’s estate, such that it is not subject to debt collection, payment of the decedent’s bills, or taxation.

However, there are certain situations in which the death benefit from a deceased individual’s life insurance policy may be transferred to his or her estate rather than to a beneficiary. This means that it will be subject to the probate process.

Defining Probate

“Probate” refers to the process by which a deceased individual’s estate is distributed. It frequently involves the use of the deceased’s will as a reference point naming beneficiaries, who are each entitled to a portion of the estate as distributed via an executor. Especially in the case of high-value estates, probate can be a heavily litigated process, with multiple parties claiming conflicting amounts of the deceased’s assets. It’s also important to note that the probate process varies heavily on a state-by-state basis and is a matter of public record.

When is Life Insurance Part of the Estate? Life Insurance and Probate in the Case of an Invalid or Out-of-Date Beneficiary Designation.

When applying for life insurance, the applicant designates one or more beneficiaries to receive the policy’s death benefit. However, problems may arise when the beneficiary or beneficiaries are deceased or cannot be reached (see our previous blog post about what happens to life insurance benefits when the beneficiary is deceased. If no designated beneficiary can be contacted to receive the death benefit, the death benefit may be added to the value of the policyholder’s estate. Consequently, the death benefit will become a part of the estate, and, therefore, will be subject to probate.

What happens when life insurance goes to the estate? Going through probate can be disadvantageous for several reasons, even if the estate value ends up being distributed appropriately. If the insured was in debt at the time of death, his or her estate will be used to pay off any outstanding debts and can even be subject to estate taxes. But if a beneficiary receives the insured’s death benefit directly from the insurance company, the beneficiary will receive the full amount without taxation or debt collection.

Many states exempt a specified amount of life insurance death benefits (e.g. up to $50,000) from debt and/or tax collection even after being transferred to the policyholder’s estate, but this depends on the laws in your state.

The big takeaway is that it’s in your best interest, as the policyholder, to keep your beneficiaries as up-to-date as possible so that your death benefits don’t go through probate. Life insurance is usually advertised as a “safe” investment, free from taxes and unforeseen deductions; however, if a policyholder’s beneficiary is deceased or cannot be located and there is life insurance without beneficiary, the death benefit may be treated the same as any other asset and consequently be subject to debt and/or tax collection through the lengthy, public probate process. Designating a secondary beneficiary (or contingent beneficiary) can help provide an effective safeguard in case something happens to the primary beneficiary.

You should know also that when there is an invalid or out-of-date beneficiary designation, or the named beneficiary is deceased, there is frequently ligitation over who is rightfully entitled to the policy’s death benefit. If you believe your life insurance claim has been wrongfully denied or that you are entitled to a death benefit that seems to be going to the estate instead, it is prudent to get the advice of an experienced life insurance beneficiary attorney. We get our clients paid!

When can an insurance company cancel a life insurance policy?

When taking out a life insurance policy, the policyholder aims to provide an extra layer of financial security and peace of mind for his or her loved ones. However, since insurers are incentivized to minimize risk, they will frequently look for reasons to cancel customers’ policies. This can jeopardize the policyholder’s supposed financial security and force him or her to evaluate other alternatives. Misrepresentations during the contestability period, nonpayment of premiums, and termination of employment are three of the most common reasons for which insurance companies may decide to cancel your policy.

The Contestability Period

The contestability period is defined as the amount of time during which an insurance company can review and fact-check information on a life insurance application. It is two years from the effective date of the policy in most states, although some (e.g. Missouri) limit it to one year. The contestability period is usually used as a means for denying claims after the insured’s death (see our blog post), but it can also be used in order to investigate and cancel existing high-risk policies.

If the policyholder left out any information on his or her policy application, such as a previous illness, medical condition, or hospital visit, the insurer has the right to investigate statements on the application and cancel coverage if something was left off. Unless there is reason to believe the application was fraudulent, the insurer has little motivation to do this while the policyholder is still alive and likely to live past the two-year contestability period.

Termination of Coverage/Lapse

The most common situation in which an existing life insurance policy may be cancelled is through nonpayment of premiums, i.e. when you don’t make one or more of your monthly payments (see our blog post for a more detailed explanation). Your coverage is unlikely to terminate if you send payment a few days late, as the vast majority of life insurance policies allow for a “grace period” of at least fifteen days. So long as the insurance company receives payment within the grace period, coverage will remain in place.

However, if the grace period expires, your coverage will lapse; in other words, your policy will be cancelled. In such a situation, you have to contact your life insurance company and meet specific conditions before reinstating your coverage. This often involves retroactively making up all missed premium payments.

Termination of Employment

Many people get their life insurance via so-called “group life insurance plans” through their employer. When you are no longer considered an active employee, your coverage will terminate along with your employment. This is often the case with workers who go on disability and are thus no longer considered “active.” Their coverage may terminate even though they are still technically employed.

In these situations, it may be prudent to request that your insurance provider convert your group policy to a privately owned, individual life insurance policy. This often requires paying high premiums and meeting certain provisions as determined by the company.

If your policy has been momentarily cancelled, you can always reinstate it or buy a new one. When the policyholder passes away before reinstating coverage, however, legal recourse may be the only option. If your loved one’s coverage was wrongfully terminated prior to his or her death, it’s best to contact an experienced life insurance lawyer to evaluate your case.

 

Do you pay taxes on life insurance benefits?

Life insurance is typically taken out to provide a secure, guaranteed pool of funds for a loved one in the event of the policyholder’s death, often used to compensate for funeral expenses and loss of income. When the beneficiary files a claim, he or she might be emotionally distraught and in desperate need of income. The last thing they’re going to want to do is think about taxes. Fortunately, the death benefit from a life insurance policy is not taxable in the vast majority of cases. However, there are several possible exceptions to this rule:

Taxes on Accrued Interest

While many life insurance policies distribute death benefits in one lump sum, some distribute death benefits via a series of regular (most likely annual) installments to the beneficiary or beneficiaries. If the principal death benefit is $100,000, paid over 10 years at a rate of $10,000 per annum, the amount left with the life insurance company each year may accrue interest. In this case, the $100,000 principal would remain untaxed, but any growth from interest would be taxable.

The Estate Tax

Additionally, if the beneficiary is not locatable and/or deceased (see our article: What happens to the benefits for a life insurance policy when the beneficiary is deceased?), the death benefit will usually be added to the policyholder’s estate. In the rare event that the policyholder’s total estate value exceeds $5,430,000, the excess amount will be taxed. At the federal level, this tax will most likely be at a rate of 40%. For example, let’s say John named his wife Susan as beneficiary on his life insurance policy, but Susan passed away a year prior to John’s death. Now John is deceased, so the death benefit from his policy is added to his estate value. His estate (including the death benefit) is valued at $10 million, so he pays 40% of ($10,000,000-5,430,000), which results in a tax of $1,828,000. John’s relatives are left with an amount of $8,172,000.

Estates less than $5.43 million are not taxed by the federal government, but state-by-state estate taxes are highly variable. Some states may tax the benefit, any accrued interest, or some combination thereof. Reassuringly, most states do not tax the actual policy value.

These are unusual and highly specific circumstances, that do not affect the vast majority of life insurance payouts. However, just because your death benefit is safeguarded from federal taxes does not mean that it’s guaranteed. Life insurance companies will often find ways to delay or deny your claim, as they are financially motivated to hold onto your benefits. If you believe that your claim has been wrongfully denied, it’s in your best interest to contact an experienced life insurance lawyer.

 

 

 

 

NOTHING IN THIS POST SHOULD BE TAKEN AS LEGAL OR TAX ADVICE.  DO NOT RELY OR ACT ON THIS POST AS LEGAL OR TAX ADVICE. WE ARE NOT TAX LAWYERS.  IT IS INTENDED TO BE INFORMATIVE ONLY.  If you have further questions or would like legal advice, please feel free to contact The Boonswang Law Firm at (855) 865-4335.

What is a spendthrift provision?

What is a Spendthrift Clause in a Life Insurance Policy?

Let’s start with defining a Spendthrift Trust Provision

A “spendthrift trust” is a form of trust meant to protect the heir of an estate from creditors. A trust is created when an individual puts money aside to be managed, invested, and distributed by a trustee.

Often, an asset management company (AMC) serves as trustee for a spendthrift trust. Trusts vary in the amount of discretion that they afford to the trustee. Some trusts specify that the trustee can distribute funds “as needed,” while others specify restricted uses or amounts at specific time intervals. In contrast to a typical trust, in which the trustee receives some level of discretion over when to use/withdraw funds, spendthrift trusts typically restrict distribution of the trust to regular installments. For instance, if the trust value were $2,000,000, the trust might be paid out over the course of 10 years through annual, $200,000 installments.

Consequently, creditors and debt collection agencies cannot come after the full value of the trust. If the beneficiary only has the latest $200,000 payment in his or her account, the creditor is unable to reach the other $1,800,000 of assets, as they still technically belong to the AMC/trust and are not at the discretion of the beneficiary/heir. Creditors can access the funds to the same extent that the beneficiary can.

DAPT States

Some states allow for the creation of “Domestic Asset Protection Trusts,” which are self-serving spendthrift trusts that protect the creator’s assets from creditors. These function in much the same manner as other spendthrift trusts, except that payments are made back to the original creator instead of a beneficiary. As of 2017, DAPT trusts are only permissible in sixteen states as the concept is still relatively new.

It is important to note that since life insurance payments go to a beneficiary after the policyholder’s death, the policyholder cannot access his or her own death benefit. Consequently, life insurance is not used as a form of DAPT.

Spendthrift Clause: What is a Spendthrift Provision in Life Insurance?

What is a spendthrift clause in life insurance? Life insurance policies are treated in much the same manner as trust funds; both function as assets accumulated over the course of the creator’s (or policyholder’s) life. Likewise, a “spendthrift provision” or spendthrift clause is a clause in a life insurance policy which safeguards the beneficiary’s death benefit from creditors.

In life insurance policies with spendthrift provisions, the death benefit assets technically belong to the insurance company, which acts as an AMC. Since the insurer (not the beneficiary) owns the total benefit, its cumulative value is not subject to the beneficiary’s outstanding debts. As with a spendthrift trust, spendthrift life insurance policies pay out benefits over a given period (e.g. five years) on a regular basis, as opposed to singular lump sum.

Life insurance companies profit from spendthrift provisions because they can access money for more time. If a life insurance company is wrongfully limiting or restricting your benefits, be sure to contact an experienced life insurance lawyer to evaluate your case.

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