Who Gets The Payout? Contesting Life Insurance Beneficiary Designation

Life insurance is a contract between the insured policyholder and the insurance company, and the payout is governed by policy terms and state or federal laws. The benefits are usually paid to the beneficiary designated in the policy, but sometimes, someone else has a valid claim to the proceeds. This means that a life insurance beneficiary designation can be contested.

Contesting a beneficiary designation

A beneficiary designation can be contested when there is a valid legal claim to do so. This may include a claim from an heir who would benefit under intestate succession, a trust beneficiary, or a fiduciary acting on behalf of the decedent, such as a trustee or personal representative.

In some cases, disputes arise when the policyholder fails to update the beneficiary information after major life events such as marriage, divorce, or the birth or adoption of children. For example, if someone divorces and remarries but doesn't update the beneficiary from their former spouse to their current one, the current spouse may contest the designation.

On what grounds can a beneficiary designation be contested?

A beneficiary designation may be contested on similar grounds to a will or trust contest, including:

• Improper execution (e.g. errors or omissions on forms)
• Lack of capacity (e.g. the account owner did not have sufficient mental capacity to understand their actions when executing the designation)
• Undue influence or duress (e.g. the account owner was manipulated or coerced into signing against their wishes)
• Fraud (e.g. the individual was deliberately tricked or misled into signing due to misrepresentation)
• Forgery (e.g. falsified signatures or documents)

In addition, a beneficiary designation can be contested if it is believed that the insured lacked the mental capacity to make the designation or was unduly influenced by another party. This often occurs when the insured is gravely ill, hospitalized, or in a nursing home, and a caregiver or someone with access to their information requests a change of beneficiary forms.

How to contest a beneficiary designation

To contest a beneficiary designation, it is important to act quickly and seek legal counsel. The process can be complex and time-intensive, and it is crucial to have specialized knowledge and skills to determine the validity of the claim and advocate for your position.

How to prevent a beneficiary designation contest

To prevent a beneficiary designation from being contested, it is important to:

• Review and update beneficiary designations after major life changes
• Follow the insurance company's procedures when making updates to avoid mistakes that can delay or prevent changes
• Communicate your beneficiary decisions to your social circle and clearly document your wishes to avoid disagreements

Grounds for contesting

There are several reasons why a beneficiary designation may be contested. Here are some common grounds for contesting:

• Improper execution: This includes errors, omissions, or mistakes made on the beneficiary designation forms. For example, failing to follow the proper procedure to name a beneficiary or not updating the information after major life events such as divorce or remarriage.
• Lack of capacity: Contesting a beneficiary designation on the grounds that the policyholder lacked the mental capacity to understand their actions when executing the designation. This may include situations where the policyholder is critically ill, hospitalized, or has a compromised mental state.
• Undue influence or duress: Arguing that the policyholder was manipulated, coerced, or pressured into signing against their wishes. This often occurs when the policyholder is elderly or vulnerable.
• Fraud: Deliberately tricking or misleading the policyholder into signing a document due to misrepresentation or providing false information.
• Forgery: Falsifying signatures or documents related to the beneficiary designation.
• Divorce: In some states, a divorce automatically revokes a beneficiary designation in favour of an ex-spouse. If the ex-spouse predeceases the insured, the policy may be left without a beneficiary, and the proceeds may become part of the estate.
• Community property claim: If the insured lived in a community property state, the surviving spouse may claim that an insurance policy purchased with community funds for the benefit of someone outside the marriage constitutes constructive fraud, and they may contest the beneficiary designation.
• Improper beneficiary change: Failing to follow the insurance company's procedures for changing a beneficiary, which may delay or prevent the change.
• Rights of minor children: Naming minor children as beneficiaries without designating a guardian or legal representative to manage the proceeds on their behalf.

It is important to note that contesting a beneficiary designation is a legal matter and requires working with an experienced attorney. The process can be complex and time-consuming, and it is crucial to have a valid legal claim to contest.

Legal process

Contesting a beneficiary designation is a complex and challenging process that requires strong legal grounds and valid reasons. Here is a step-by-step guide outlining the legal process for contesting a beneficiary designation:

Step 1: Determine Standing

To contest a beneficiary designation, the first step is to establish standing. This means that you need to have a direct interest in the matter and be able to demonstrate how you would be affected by the outcome. Typically, individuals with standing include heirs, estate beneficiaries, trust beneficiaries, previously designated beneficiaries, and fiduciaries representing the decedent's estate or trust.

Step 2: Identify Valid Grounds

Contesting a beneficiary designation requires valid legal grounds. Common reasons for contesting include fraud, undue influence, lack of capacity, improper execution, and mistake. You will need to gather evidence to support your claim and prove that there was some form of wrongdoing or invalidity in the designation process.

Step 3: Understand the Rules and Laws

It is crucial to understand the rules and laws governing the specific asset in question. Different types of assets, such as life insurance policies, retirement accounts, and bank accounts, may have varying protocols and requirements for contesting beneficiaries. Consult with relevant financial institutions and seek legal advice to navigate the specific rules and regulations.

Step 4: Hire a Beneficiary Attorney

Contesting a beneficiary designation is a complex legal process, and it is highly recommended to seek legal representation. An experienced beneficiary attorney will guide you through the process, handle the necessary paperwork, and represent your interests in court if needed. They can also advise on the potential for settlement options.

Step 5: File a Dispute with the Court

Once you have established standing, identified valid grounds, and consulted legal counsel, you can proceed to file a dispute with the court. This typically involves presenting evidence and legal arguments to support your claim. The court will then review the case and make a determination.

It is important to note that contesting a beneficiary designation can be a lengthy and expensive process, and there is no guarantee of success. It is always advisable to seek legal advice and carefully consider all options before initiating legal proceedings.

Preventing disputes

Life insurance is a legally binding contract between the insured policyholder and the insurance company. The benefits are usually paid to the beneficiary designated in the policy. However, disputes can arise when someone other than the named beneficiary has a valid claim to the proceeds.

• Review the policy regularly: It is important to review the policy after any major life changes, such as marriage, divorce, the birth of a child, or the death of a loved one, to ensure that the beneficiary designations are up-to-date and reflect the policyholder's current wishes.
• Follow proper procedures: When making changes to beneficiary designations, it is crucial to follow the insurance company's procedures to avoid mistakes that could delay or prevent the changes from taking effect.
• Communicate with beneficiaries: Keeping previous and current beneficiaries informed about any changes can help avoid misunderstandings and disagreements.
• Seek legal advice: Consulting with an experienced estate planning or probate attorney can help ensure that beneficiary designations are made in accordance with applicable laws and reduce the risk of future disputes.
• Consider the impact of other documents: Beneficiary designations should be consistent with other relevant documents, such as wills, trusts, and marriage contracts, to avoid confusion and potential litigation.
• Choose the right type of designation: In some cases, a revocable beneficiary designation may be more appropriate than an irrevocable designation, as it allows the policy owner more flexibility to make changes in the future.
• Understand the role of the advisor: Advisors play a crucial role in completing application forms and ensuring they accurately reflect the client's wishes. Errors made by advisors can lead to disputes, as seen in the case of Anderson v. Industrial Alliance Insurance.
• Be mindful of revocation: When revoking a beneficiary designation, it is important to inform the insurer and clearly designate a new beneficiary to avoid the risk of proceeds ending up in the wrong hands.
• Ensure proper execution: Incomplete or incorrect forms can lead to disputes, so it is essential to ensure that all beneficiary designations are properly executed and free from errors, omissions, or mistakes.
• Consider potential conflicts: When designating beneficiaries, it is important to consider potential conflicts, such as those that may arise between family members, and seek legal advice to resolve them.

Settling disputes

Disputes over beneficiary designations are common and can be complex and time-consuming to resolve. They often arise from simple human error, such as a failure to update beneficiary information after a major life event like a divorce or remarriage. In other cases, there may be allegations of undue influence, duress, fraud, or mental incapacity.

If you are involved in a dispute over a beneficiary designation, it is important to act quickly and seek legal counsel. An experienced attorney can help you understand your rights and options and represent your interests in court if necessary.

• Gather information and evidence: Collect copies of the relevant documents, including the original beneficiary designation, any changes made to the designation, and other relevant estate planning or financial records.
• Assess your legal standing: To contest a beneficiary designation, you must have a valid legal claim. Typically, only those with a direct interest in the outcome, such as an heir, a trust beneficiary, or a fiduciary acting on behalf of the deceased, have standing to dispute a beneficiary designation.
• Prove the designation does not reflect the decedent's wishes: To successfully challenge a beneficiary designation, you must prove that it does not reflect the wishes of the deceased. This may involve demonstrating improper execution, lack of capacity, undue influence, duress, fraud, or forgery.
• Consider mediation or negotiation: Before going to court, consider resolving the dispute through mediation or negotiation. This can be a faster and less costly option than litigation and can help avoid a lengthy court battle.
• Be prepared for court if necessary: If the dispute cannot be resolved out of court, be prepared for the possibility of a lawsuit. This may involve gathering additional evidence, retaining expert witnesses, and preparing for court proceedings.

It is important to remember that each case is unique, and the specific steps and strategies may vary depending on the circumstances. Seeking legal advice from an experienced attorney is crucial to understanding your options and protecting your rights.

Frequently asked questions