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When Life Changes, Update Your Beneficiaries

3 September, 2014

It’s easy to see how this happened, and also how easily it could have been prevented…

In 1996, Warren named his wife Judy the beneficiary on his group life insurance policy with Federal Employees’ Group Life Insurance (FEGLI). Two years later, Warren and Judy divorced.

In 2002,Warrenmarried Jacqueline. In 2008,Warrendied unexpectedly. You can guess what happened. Ten years after his divorce and six years after his remarriage,Warrenhadn’t amended his FEGLI beneficiary. When Warren died, Judy was still his named beneficiary.

However, aVirginiastatute says that when a couple divorces, they automatically terminate their spousal beneficiary status. This led to a dispute between the widow (Jacqueline) and ex-wife (Judy) over who was the rightful recipient of the FEGLI benefits. The case eventually made its way to the U.S. Supreme Court, which rendered a decision in June, 2013. The verdict: Judy, the ex-wife, was the legal beneficiary.

The Court ruled 9-0 for the listed beneficiary on a relatively technical matter: Because FEGLI insurance benefits were created by a federal law, the “Supremacy Clause” in the U.S Constitution states federal law has precedence over state law. The Court also pointed out that allowing states to arbitrarily override written beneficiary designations could make it too easy for litigants to question and undo the intentions of decedents (who can no longer speak for themselves).

Of course, the entire mess could have been settled ifWarrenhad taken five minutes to complete an updated Change of Beneficiary form. If you care enough to insure your life, you want to make sure the benefits will be distributed according to your clearly-stated wishes.

Getting it right

There are two critical aspects to proper beneficiary designation: The name of the beneficiary, and the relationship of the beneficiary to the insured. The most common beneficiary is a natural person, but beneficiaries can also be trusts, charities, businesses, or other entities established by law. Regardless, proper identification is a must – names and titles spelled correctly, birthdates and trust dates listed accurately, etc. (Many financial institutions request a tax ID number as well.)

The definition of the beneficiary relationship matters as well. Does the beneficiary statement “all children of (the insured)” include those born after the policy was established, or, make a distinction regarding children from other relationships?

When to review

In general, any “life-changing event” should trigger a beneficiary review. These are events that reconfigure your finances or your relationships. An annual beneficiary check-up is a good idea, too. Life-changing events include:

  • Divorce. This event can compel a range of beneficiary issues, some of which may be court-ordered. Besides life insurance, retirement accounts may be involved as well. 
  • Death of a spouse. Typically a big beneficiary issue, because spouses are often primary beneficiaries. If they die, who steps into the primary beneficiary position?
  • Additional children or grandchildren. If benefits are intended for multiple beneficiaries, you may have to decide whether equal or proportionate distributions are “fair,” especially when the proceeds are intended for grandchildren.
  • Change in employment status. If you leave an employer, some of your benefits may be vested (many veterans have life insurance benefits). Retirement accumulations rolled into IRAs mean new beneficiary forms. Enrolling in a new menu of group benefits will also mean beneficiary paperwork.
  • Move. Some financial instruments’ only communication is an annual statement. If you have relocated, what are the chances the financial institution didn’t get a forwarding address? The move may not immediately impact your beneficiaries, but if you don’t receive statements, you might forget you have the asset. Losing track of an asset is almost as bad as having it go to the wrong beneficiary.
  • Dormant financial assets. Paid-up life insurance policies and deferred annuities no longer receiving deposits can easily be overlooked.