It happens more often than you might imagine. After losing a loved one, family members discover that the deceased’s life insurance policy is about to be paid out to an unexpected beneficiary. Such news can come as a nasty shock, and—unfortunately—it can herald an uphill battle to get the situation resolved.
Given that a life insurance or annuity is a direct contact between the insured (the deceased) and the company providing the insurance/annuity, the claims are settled independently from any Will or Trust that the deceased may have had in place.
In other words, the policy passed directly to the beneficiaries without having to go through probate. This means that if there is a challenge to the beneficiary designation, there is a separate legal proceeding.
When a beneficiary designation can be challenged
The general rule of course is that the named beneficiary should receive the proceeds of a life insurance upon the death of the insured. However, there are some circumstances where the beneficiary designation can be challenged.
- Failure to follow the proper procedure to name or change the beneficiary
In order to change the beneficiary, the insured must follow the steps the insurance company requires. But there are exceptions. One well-recognized exception is “when the insured has done all in his power to comply with the procedure set out in the policy but has failed because of some circumstance beyond his control.” Aetna Life Ins. Co. v. Hartford Nat’l Bank & Trust. Whether the insured did everything in his power to change the beneficiary will depend on the facts and circumstances of every case.
- There is a separate unrelated contract
In some cases, the insured and another party enters into a contract over the proceeds of the life insurance policy. This often happens in divorce agreements. Some divorce agreements provide that the ex-spouses waive their rights to be beneficiaries of each other policies, while other divorce agreements may require one party to keep the ex-spouse or a child as a beneficiary. Legal disputes often arise between the estate of the insured and the ex-spouse if the language of the contract is ambiguous. If the contract between the parties is ambiguous, courts will focus on the intent of the parties when signing the agreement.
- Cases involving the possibility of undue influence, lack of capacity, or forgery/fraud
Finally, there are more nefarious cases in which there has potentially been some kind of intentional foul play. These kinds of situations are often easy to identify because they involve the insured making significant (and usually unexpected) changes to estate plans and beneficiary designations late in life.
Undue influence cases involve a third party using threats, isolation, or other forms of manipulation and coercion to influence how the insured designates a beneficiary. This often comes up in instances where the beneficiary is a caregiver, someone with power of attorney, or another individual who is a trusted confidant of the insured.
Lack of capacity or mental incompetence cases involve the insured lacking an understanding of the documents they’re signing. For instance, a dementia patient might sign beneficiary designation papers without knowing what they are or might designate someone (such as a caregiver in a nursing home) as the beneficiary—not out of spite or because of undue influence, but simply because they didn’t know what they were signing.
And, in cases of fraud or forgery, the issue is just what it sounds like—someone falsifying paperwork themselves or misleading the insured into signing something by feeding them with incorrect information.
Call the insurance company!
As we’ve already said, challenging the designation of a life insurance beneficiary isn’t an easy task, but if the case warrants, the effort can be worth it.
If you have a good-faith basis and are considering challenging the named beneficiary’s right to payment, your first step is to immediately communicate your intent to challenge to the insurance company. Most insurance companies will not process a payment if they are aware of a dispute. In such cases, timing is of the essence because, once an insurance company pays the named beneficiary, you may face trouble collecting the money even if you get a favorable judgment.
From there, the issue will be handled in either a civil court or a probate court. In either case, if you want to challenge a beneficiary designation, we highly recommend you give us a call for support and guidance. Contesting a beneficiary designation is a complex undertaking that requires experience and an in-depth understanding of the applicable laws – we can help.