One of the questions that I am asked frequently deals with life insurance beneficiary designations made through the life insurance company and whether a last will and testament will alter this designation. I give you the following e-mail sent to me from Stephanie R. in Denver, Colorado concerning this issue:
“Dear PIB, my father-in-law recently passed away. We have found out that he has several life insurance policies that show his wife (my mother) as the beneficiary on both policies. When reading his will, the attorneys discovered that he attempted to change who gets the life insurance money through the will. As best as we can determine, no changes were ever made at the insurance company. We have talked to his agent, the insurance company and anyone else with knowledge about the life insurance payment and it appears as if the will won’t change anything…it had to be done through the insurance company in order to be effective. The reason I ask is that the will named my husband and me as the people who were supposed to get the money. We don’t need the money, it’s just that my mother has a tendency to spend money on things that she doesn’t need and we’re worried that she’ll spend it foolishly. Any advice? Thanks, Stephanie.
Dear Stephanie,
It is extremely rare that a last will and testament will change or overturn a life insurance beneficiary designation shown in the life insurance contract. There are certain state-mandated requirements as to who can actually be named as a beneficiary in certain plans, like Qualified Retirement Plans (QRPs) and IRAs. Most states require that your legally-married spouse is the beneficiary on QRPs and at times, IRAs, unless the spouse waives their right to the designation in writing.
As well, the only instances in which I have actually seen a life insurance beneficiary designation overturned is where the plaintiff was able to prove that the designation was made under duress, such as the beneficiary threatening to do some sort of harm to the policyowner- “I’m going to ruin your life unless you make me the beneficiary” kind of thing. Other than that, I’ve never seen a court overturn a beneficiary designation. Now, I’ll be the first to admit that I haven’t seen everything, but I haven’t seen this.
Another concern is that if in fact the will did govern the distribution of the life insurance assets, then those assets would be subject to probate cost and potential estate taxation. Not a good thing! Life insurance is intended to be held outside of the estate; it preserves the federal tax-free status of the death benefit.