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Importance of Life Insurance and Pension Beneficiary Designations

Updated on May 29, 2012


Contemplating our own death is never easy, so it's common for people to not pay enough attention to key estate planning tools such as a will and beneficiary designations on insurance, retirement, and other such plans.

But death is often unexpected, so it's important to keep these documents current to make sure your property goes where you want it to. If you have life insurance or a retirement plan through your employer, don't hesitate to consult with the benefits staff to make sure you understand how to fill out the beneficiary designation forms to get the funds where you intend.

If you have any such insurance policy or retirement plan on your own, contact the relevant issuing company or institution to verify or update your beneficiary information.

Where minor children are involved as beneficiaries, you should also understand the relevant state laws about how their funds must be managed. It's always a good idea to consult with an attorney in such a situation.


Here's a few basic terms to review:

When you die without a will. Each state has its own rules about how your property gets distributed after you death if you don't have a will.

For example, it's common for a single, childless person's estate to be divided equally between his or her surviving parents. If the parents die before their child, the deceased's siblings would generally receive the property. An estate attorney can advise on how your state's rules work.

Failure to leave a will can complicate settling your estate and result in your property not going where you want it to. There are many options for putting together a will, and your employer might even have a legal services benefit for this very purpose, sometimes as part of an Employee Assistance Program (EAP).

The process of settling your estate through the court system. Any property subject to probate has to be accounted for, and the probate court has the final OK in distributing property. The process can be time-consuming, even with the least complicated estates.

Who will get the funds from your life insurance, retirement account, or pension plan if you die. A beneficiary can be an actual person or an organization such as a school, house of worship, museum, etc.

Some people choose to put down "Estate" which means any proceeds will go to your general estate to be distributed by your will or under the intestacy laws of your state. This might be the result you want - and means you only have to update your will if circumstances change - but it also means the funds are subject to the probate process.

One of the advantages of both life insurance policies and most retirement plans is that they are normally not subject to probate meaning the beneficiaries can get the money much faster. When your family is faced with adjusting to your loss and associated expenses, the faster access to funds (particularly life insurance) can make a big difference.

Primary Beneficiary
Whoever is first in line to get the money. It can all go to one individual or it can be split among multiple parties. Most beneficiary designation forms have space to let you split the proceeds where you can enter a percentage. Just make sure it adds up to 100 percent.

Contingent Beneficiary
Whoever gets the money if all primary beneficiaries die before you do. As with the primary, you can split it among several parties.

Primary versus Contingent Beneficiary

Primary versus Contingent is probably one of the most commonly confused distinctions when it comes to naming beneficiaries. Unless the contract (in the case of life insurance) or state law say otherwise, all named primary beneficiaries must be dead before the contingent can get anything.

Say you decide to split your life insurance 50/50 between your two brothers:

  • You list each brother as a primary beneficiary with a 50% share.
  • Each brother has children, all of whom you name as contingent beneficiaries.

Unfortunately, one of your brothers dies before you do, and you never change your beneficiary form. When you die, your surviving brother will get everything while the children of your deceased sibling get nothing from your life insurance. If you had wanted them to get a portion, you would have had to change your beneficiary form adding them to the Primary section.

If you name multiple beneficiaries as either Primary or Contingent, the proceeds will be split equally unless you state otherwise on the form.

You will often have the option of maintaining your beneficiaries online, so "form" can mean paper or electronic means.

Life Insurance

Life insurance policies fall under contract law. There's generally no requirement to name anyone in particular as a beneficiary, and the funds should be distributed just as you designate on the beneficiary form. Courts don't like overriding beneficiary designations for life insurance policies unless there's credible evidence of fraud, duress, mental incapacity, or similar serious situations.

It's wise to set up your beneficiaries using a worst-case-scenario, particularly in the case of couples or where minor children need to be accounted for.

Most couples will name each other as primary beneficiary. This setup makes perfect sense in most cases, but when the individuals die within a short period of time of each other such that there's no opportunity to change beneficiary designations, things get a bit more complicated.

We'll call the individuals in this example A and B. They've named each other primary beneficiary on their respective life insurance policies. A's sister is contingent on A's policy, while B has named a local museum as contingent. Here is the scenario under consideration:

  • A and B are in a bad car accident while traveling together.
  • A dies at the accident site.
  • B lives for another day and dies in the hospital without regaining consciousness.

Here is what will happen to the life insurance proceeds for each:

  • A's life insurance proceeds will go to B. The funds will become part of B's general estate to be distributed according to B's will or by intestacy law, whichever is the case.
  • B's life insurance proceeds will go to the local museum.
  • A's sister does not get any life insurance proceeds.

Work through a couple scenarios to make sure the money flows where you want it to. If necessary, consult an attorney about how the rules work in your state when it can't be determined which individual died first.

Another important consideration is simply making sure you pay attention to the form!

I've encountered a situation at work where a father put his daughter down as primary and his two sons as contingent. Based on comments he made to a staff member, however, we know he intended them all to be primary with equal one-third shares but somehow we missed the problems with his form. When he passed away and we examined his beneficiary designation form, we realized that, fortunately, he had put "33%" by each of their names. The insurance company agreed with our interpretation that the funds should be split equally among the three children, otherwise the daughter would have received everything. (In this case, the split really did matter because the daughter is the child of his first - deceased - wife while the boys are from his current relationship.)

Believe me, we've become a lot more paranoid about checking beneficiary forms to try to avoid similar situations. We actually did a full audit recently of all the forms that turned up incomplete, vague, unsigned, and other problematic examples that we have had our employees correct.

Retirement or Pension Plan

Most retirement plans, such as your 401(k) or 403(b), are governed by ERISA, a federal law passed in 1974. Under ERISA, a married person's spouse is automatically entitled to a minimum 50% share of the retirement funds unless he or she waives this right.

ERISA provisions usually trump state property law with regard to covered plans, although divorce settlements can potentially affect distribution of funds.

Since ERISA is a federal law, however, there are still unanswered questions about how the gradual legalization of same sex marriage at the state level intersects with the spousal provisions of ERISA. As long as the Defense of Marriage Act (DOMA) is in place, it's best to consult with your estate planning attorney to ensure your beneficiary designations for your retirement plan are clear and complete.

Just as with any policy or plan with named beneficiaries, it's important to review your designations when experiencing significant life changes. We have a case at work that demonstrates the potential problems if this advice is ignored. The origins of the current situation go back several decades, long before any of our current Human Resources staff met the employees involved.

  • Employee A married Wife 1 some 35 years ago. He named her as his sole primary beneficiary on his retirement plan.
  • A and Wife 1 divorce after a couple years of marriage.
  • About 10 years later Employee A marries Employee B. They have two children.
  • A and B separate but never divorce. They share the raising of their children.
  • Employee B dies of cancer about 8 years ago. Since Employee A did not need the funds from her retirement account, he waives his right to them as part of B's estate planning prior to her death. The children split the retirement funds 50/50.
  • A couple of years ago Employee A is also diagnosed with cancer. He meets with our Benefits Manager who reminds him to update his beneficiary information. Unfortunately, we later learn he never got around to it.
  • Within a year of diagnosis, B passes away. His children (who are young adults) finally learn that their father was previously married and that the first wife is still the named beneficiary on his retirement account (the balance is in the seven figures).

The children are still trying to get this situation settled. If their mother were still alive, she would have been entitled to a minimum 50% share under ERISA, but children...not so much. They don't even know if the first wife is still alive. So, it's a mess. And one that could have been avoided had Employee A made one phone call.


The above is one of the messier situations we've encountered recently in my office, but I can see similar issues happening quite easily in today's world of shifting family structures.

Learn from the mistakes of others and review your beneficiary designations on any relevant policies and plans. It might seem morbid and something to avoid, but you can make things much easier on your loved ones if you have your affairs in order.


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