Will My Designated Beneficiary Receive the Proceeds From My Life Insurance Policy?

January 6, 2015

The answer should be yes, but if you have had major life events in your family, such as births, adoptions, divorce, marriage, or deaths, your loved ones may be in for a surprise. If you fail timely to update your beneficiaries, or fail to provide a paper trail showing your intent to keep them the same, you may unwittingly be disinheriting a child or benefiting an ex-spouse. 

One Ohio family recently learned that they would not receive their deceased husband’s and father’s retirement benefits because the beneficiary designation on his 401(k) had remained unchanged after he had married and become a father. The deceased man’s parents would take the benefits pursuant to the outdated beneficiary designation. See Bussberg v. Federal Retirement Thrift Investment Board

In some cases, state law has attempted to “cure” the common case where an owner of a financial account fails to update a beneficiary designation. For example, in Ohio, there is a default rule that a termination of marriage will automatically revoke a designation of the ex-spouse as a beneficiary (unless the divorce decree says otherwise). But it is a limited and imperfect cure. 

According to the United States Supreme Court, Ohio’s default rule will not apply to federal government benefits, such as benefits from your federal employer or certain retirement-related benefits. In Hillman v. Maretta, a federal employee left his ex-wife as the designated beneficiary on his federal employee group life insurance policy, even after he remarried. A state law would have automatically terminated the ex-wife's beneficiary rights at the time of the divorce, but a federal law required the insurance proceeds to go to the designated beneficiary, regardless of the unexpected change in circumstance. In the end, the court respected the beneficiary designation and held that the ex-wife was entitled to the life insurance proceeds – a result the deceased husband could have avoided by timely updating his beneficiary designation. 

But what if your ex-spouse “was the best thing that ever happened to [you]” and you wish for your ex-spouse to remain as your beneficiary? Apparently, the revocation-upon-divorce rule can be avoided in at least two ways. By statute, the sure-fire way is to preserve the beneficiary designation in the divorce decree. But failing that, you should leave a paper trail. One Ohio man told his financial advisor multiple times after his divorce, and the financial advisor maintained notes in the man’s file, that the man wanted to retain his former spouse as his beneficiary. The man’s children inevitably contested the pre-divorce beneficiary designation, but the financial advisor’s notes made the man’s wishes known to the court. See Motorist Life Ins. v. Sherbourne.

Depending on how your assets are allocated, the beneficiary designations for these policies and accounts can be just as important as the beneficiary designations in your will, trust, and other estate planning documents. The estate and succession planning attorneys at RCO Law are equipped to assist you in all of your wealth and business planning needs.

By Sarah Corney, you may contact her at scorney@rcolaw.com or 419-418-6459.


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