by Guest » Tue Mar 01, 2011 10:46 pm
My aunt had a life insurance on her son, she was the named beneficiary and has predeceased the insured. One of the daughters continued to pay the policy, and then the insured passed away. How can this daughter get the insuarance company to pay her the benefits so she can pay the funeral expenses.
Posted: Thu Mar 03, 2011 12:24 am Post Subject:
. As to the statement that most life insurance is owned by the insured... show me statistics
I can't. I don't have the stats. Do a little experiment. Ask 10 people about their personal life insurance and whether they own the policy or if someone else does. I bet that 9 of them own their own policy.
Think about a typical life insurance sale. Joe is 30 and owns a $500,000 20 year term life policy. Other than the policy, his net worth is $150,000. There simply isn't much of a point to him not owning the policy while not owning the policy forces him to give up control. If there are estate tax issues, I agree that this needs to be done differently.
I know that I'm asking you for a citation, but that's because I can't find the information and I'm pretty sure that you are wrong, but if you are right, I want to know for sure because it would mean that there is a big gap in my knowledge.
Posted: Thu Mar 03, 2011 12:27 am Post Subject:
By the way, section 2042 deals with life insurance proceeds. If the owner dies, and the insured is still alive, this situation is not covered with what you posted.
Posted: Thu Mar 03, 2011 03:03 pm Post Subject:
InsTeacher, I did have the chance to talk to one company today. If there is no living beneficiary, MassMutual pays the money to the policy owner if living or if the owner is dead, they pay it to the owner's estate.
I think that this is one of those things that somehow got entrenched in your mind and what you read backs up your beliefs.
Notice that if you Google this subject and read articles, it is pretty clear that they are making the assumption that the insured owns the policy. If you can find anything that you can point me to that says it doesn't get paid to the owner if the owner and the insured are different, it would be greatly appreciated.
I'm curious about something. If I'm the owner and you are the insured, if it gets paid to your estate, would that invoke the Goodman Triangle? I am pretty sure that you are separate from your estate, but I have no idea of the answer.
Posted: Thu Mar 03, 2011 08:04 pm Post Subject:
My aunt had a life insurance on her son, she was the named beneficiary and has predeceased the insured.
isn’t this normally “second-party” ownership?
Regarding your statement that "the owner is typically the insured:" I absolutely disagree with this, in fact, the opposite is true. You do NOT WANT TO BE THE OWNER of the policy covering your own life.
This is referred to as "first-party" ownership- where the policy owner and insured are the same person. In the event of the death of the insured/owner with first-party ownership, the proceeds paid to the beneficiary are now included in the insured's gross estate for tax and probate purposes. THIS IS NOT GOOD!
Think about a typical life insurance sale. Joe is 30 and owns a $500,000 20 year term life policy. Other than the policy, his net worth is $150,000. There simply isn't much of a point to him not owning the policy while not owning the policy forces him to give up control. If there are estate tax issues, I agree that this needs to be done differently.
If I'm the owner and you are the insured, if it gets paid to your estate
OK . . . InsTeacher has asked me to weigh-in on this thread. And I've pulled in some assorted comments to reply to, beginning with the OP's.
Common policy language (of course, we'd have to see the actual contract in question to be certain) usually states that if the owner is not the insured, and the owner predeceases the insured without assigning ownership to a new owner, then the ownership of the contract will automatically transfer to the insured. I probably have 50-60 copies of assorted policies in my files, and I have not yet seen one in which this was not the DEFAULT.
So, to answer the OP's question, if there was no named contingent beneficiary, and as the new owner the insured cousin failed to name a new primary beneficiary, the money is now only payable to the estate of the owner (the OP's cousin). Once in the estate, the probate court will determine the disposition of the total estate assets. Generally, reasonable funeral expenses will have a priority over other claims of "creditors" -- they don't want dead bodies piling up on the courthouse steps for want of burial money.
Now to the more esoteric portions of the discussion.
jakldfja defers to "semantics" and asks about "second-party ownership". That's a laugher! The two parties to a life insurance contract are the OWNER (party 1) and the INSURANCE COMPANY (party 2). The insurance company has no business being, and would never want to be, the owner of the policy. So you can have first-party ownership (most common) or third-party ownership (mostly business uses, but also trusts, and occasionally individuals, as in the case of the OP's aunt), but NEVER second-party ownership. Ownership at the time of policy issue demands INSURABLE INTEREST or the contract is void.
I'm going to respectfully disagree with InsTeacher on the issue of the frequency of first-party ownership. Most agents (1) don't really understand the importance of ownership and (2) don't really care who the owner is as long as they get a commission check. So they write an app, list the insured and never raise a discussion of ownership, who will be the de facto owner by virtue of contract language ("In the absence of another person named as owner, the insured is the owner of this contract."). Clients trust their agents to be knowledgeable and provide wise advice. Few agents actually do that for their clients.
So as a result, yes, the vast majority of individual policies probably are owned by the insured -- are there published statistics? Probably not. This is purely based on personal observation, so is only anecdotal.
Is this a good thing? Possibly not. And I'm going to side with InsTeacher on this point, as he correctly observes, life insurance owned by the insured will be includable in the value of that person's estate at death. Given the fact that estate tax has returned in 2011 -- thanks to the cowards in Congress (Dems/Reps/Inds) who cannot resist the temptation to put their hands on other people's money and convert it into "pork" for the home district, or bombs, or entitlements for illegal aliens, or whatever -- it should be on the minds of agents to discuss this with clients and be aware of the client's actual circumstance.
At the $5,000,000 exemption level, it is also true that many persons' estates will not be exposed to the estate tax. But it's also combined with the Gift Tax exemption, so certain folks who have not actually been paying their gift taxes but have been biting into their "Unified Credit" by giving lavish gifts to their children and others beyond the annual limit, could be creating a very different measure of exposure for their estates.
Merely putting the ownership of a life policy in a trust can be insufficient to protect against taxation. If the trust is not irrevocable, then the IRS believes that the grantor-owner has retained "incidents of ownership" and the value of the proceeds will be added to the value of their estate.
fjamv argues on the side of the unimportance of policy ownership for a 30-year-old. Given the limited scenario (this person -- assuming at age 30 -- has assets of $150,000), under today's tax landscape, he would have no estate tax exposure. But that's today. If we're going to speak in hypotheticals, what about "tomorrow"?
Parents will die, leaving their assets behind, retirement accounts will increase in value, the 30-year-old may become a homeowner and acquire more assets along the way. The potential to eventually have assets that exceed the "exemption" amount exists. But you can bet that the insured will have long ago forgotten about the ownership of his life insurance as part of the equation.
So advising a client to speak to a tax planning professional or estate planning attorney about the use of a life insurance trust (which will be irrevocable) might be of some value to the 30-year-old in fjamv's scenario. A later decision to assign ownership to the trust could still run afoul of the estate tax if not done far enough in advance. The rule used to be 36-months in advance of death. But I believe that has been changed to 60-months to be consistent with the change to Medicaid law that extends the lookback period to 60-months for purposes of the spenddown test. That change occurred in 2007 or 2008, if I'm not mistaken.
fjamv says the insured who decides to place ownership with a third party gives up control of the policy. That's the point when it comes to taxation. And it does allow the third-party owner the right to name and change beneficiaries, which is the purpose of putting the money in a trust instead of the hands of an individual. The trust document can disallow the changing of beneficiaries on an absolute basis, permanently earmarking the money either on a per capita or per stirpes basis. Also, if it's a term policy, as fjamv proposes, then there really are few other major ownership issues (such as taking loans or exercising a nonforfeiture or conversion option) that would be of great concern to the first-party insured/owner.
Finally, fjaru posts an implausible scenario: I'm the owner and you are the insured, if [the death benefit] gets paid to your estate . . ." That cannot happen unless "The estate of the insured" is specifically named as the beneficiary. I can hardly imagine this statement ever being recorded as the beneficiary. "My estate" would be more likely, although I never permit someone to do that, and it would be understood to mean the estate of the OWNER, not the insured. If there is no named beneficiary, contract language directs the proceeds to the owner (or the estate of the owner, if deceased FOLLOWING the death of the insured -- I've already addressed what happens when the owner predeceases the insured).
So everyone has posted points that are accurate, and points that may not be as accurate. No real harm done as I see it.
The real upshot of this whole thread needs to be a discussion of THE IMPORTANCE OF MAINTAINING A CURRENT BENEFICIARY STATEMENT THAT NAMES THE ACTUAL PERSONS/THINGS THE MONEY IS SUPPOSED TO BENEFIT -- as is true of most of the beneficiary questions that are posted here. I have posted in the past the need to revisit this on a regular basis, whether that's annually, or every two or three years. In my experience, most agents never follow up on matters like this. [/i]
Posted: Thu Mar 03, 2011 10:33 pm Post Subject:
Max, let's not make stuff up.
Common policy language (of course, we'd have to see the actual contract in question to be certain) usually states that if the owner is not the insured, and the owner predeceases the insured without assigning ownership to a new owner, then the ownership of the contract will automatically transfer to the insured. I probably have 50-60 copies of assorted policies in my files, and I have not yet seen one in which this was not the DEFAULT.
I'm not saying that you are making this up, but I would like to see this since you have 50-60 policies that say this.
I know that MassMutual doesn't do it this way and with a quick look I see that Americo doesn't either. From Americo:
How do I change the ownership of a policy when the current owner is deceased?
To transfer ownership of a life insurance policy from the estate of a deceased owner, we require:
1. a certified copy of the death certificate,
2. a certified copy of Letters of Administration appointing the Personal Representative of the deceased owner, and
3. a copy of the document closing the estate if the estate has been closed.
The Personal Representative may designate the owner of the policy by completing the appropriate Ownership Change Request Form and forwarding it to us along with the first two items above. Please note, we cannot process the transfer without the requested items.
If the deceased owner did not leave a will, or the will is not probated, we recommend you contact your attorney or the Clerk of the Probate Court (in the county where the owner resided) for information on the procedure to file an affidavit for collection of personal property without probate, or other similar form pursuant to local law.
Who may be named as owner?
The owner may be one or more persons, a trust, a trustee, a corporation, or any other entity from which a legal signature (or signatures) can be obtained; however, please be aware that designation of multiple owners is discouraged. If multiple owners are designated, the signature of every owner must be included on any future policy change requests.
What is the difference between a primary owner and a contingent owner?
The primary owner is the party or parties who maintain control of the policy while the insured is living. The owner of the policy is the only person who can make changes to the policy.
The contingent owner assumes control of the policy if the primary owner dies before the insured. The contingent owner only assumes control if (all of) the designated primary owners have died before the insured.
How can I name joint owners?
To name joint owners, designate whether the owners are to share as Joint Tenants With Rights of Survivorship or as Tenants in Common Without the Right of Survivorship. "With Rights of Survivorship" means if one owner dies, his or her interest will pass to the surviving owner(s). "Without Rights of Survivorship" means if the owner dies, his or her interest will pass to his or her estate.
How do I name a trust as my owner?
Please provide the name, date the trust was created, trustee's name, and location of the trust on the appropriate Ownership Change Request Form .
What is required if I live in a community property state?
If you reside in Guam or one of the community property states listed below, your spouse's signature is required to change ownership for a policy. If you are divorced, a copy of the divorce decree showing all rights were given up by your spouse is required. If your spouse is deceased, a certified copy of the death certificate is required. Your change of ownership request cannot be processed without this documentation.
Posted: Thu Mar 03, 2011 10:37 pm Post Subject:
jakldfja defers to "semantics" and asks about "second-party ownership". That's a laugher! The two parties to a life insurance contract are the OWNER (party 1) and the INSURANCE COMPANY (party 2). The insurance company has no business being, and would never want to be, the owner of the policy. So you can have first-party ownership (most common) or third-party ownership (mostly business uses, but also trusts, and occasionally individuals, as in the case of the OP's aunt), but NEVER second-party ownership. Ownership at the time of policy issue demands INSURABLE INTEREST or the contract is void.
Max, unlike you, I have no problem admitting when I'm wrong or when I don't know something. Look at my quote. I was asking about something because I didn't know for sure.
Posted: Thu Mar 03, 2011 10:45 pm Post Subject:
fjamv argues on the side of the unimportance of policy ownership for a 30-year-old. Given the limited scenario (this person -- assuming at age 30 -- has assets of $150,000), under today's tax landscape, he would have no estate tax exposure. But that's today. If we're going to speak in hypotheticals, what about "tomorrow"?
I don't argue on the unimportance of policy ownership for a 30 year old. I'm arguing that estate taxes aren't an important consideration for a married 30 year old with a 20 year term policy and not a lot of assets. If this person expects to come up with an additional $5,000,000 in the next 20 years, that is obviously a very different example.
We have two sides of the coin with this. On one side is estate taxes. On the other side is policy control. My point is that if one has a low chance of being hit with estate taxes, policy control is more important to them.
I'm not sure how you can argue against this.
Posted: Thu Mar 03, 2011 10:49 pm Post Subject:
So advising a client to speak to a tax planning professional or estate planning attorney about the use of a life insurance trust (which will be irrevocable) might be of some value to the 30-year-old in fjamv's scenario
You do realize that setting up the ILIT will be more expensive than the actual life insurance, don't you?
You do realize that if the money is for his wife, there won't be any estate taxes, don't you?
Posted: Thu Mar 03, 2011 10:55 pm Post Subject:
fjamv says the insured who decides to place ownership with a third party gives up control of the policy. That's the point when it comes to taxation. And it does allow the third-party owner the right to name and change beneficiaries, which is the purpose of putting the money in a trust instead of the hands of an individual. The trust document can disallow the changing of beneficiaries on an absolute basis, permanently earmarking the money either on a per capita or per stirpes basis. Also, if it's a term policy, as fjamv proposes, then there really are few other major ownership issues (such as taking loans or exercising a nonforfeiture or conversion option) that would be of great concern to the first-party insured/owner.
Yes, it's good from a taxation standpoint if their is a taxation issue. This usually is not the case. I use ILITs. I don't use them for people who shouldn't be expecting an estate tax issue and have their spouse as beneficiary.
Unless it is necessary, why would the insured/owner want to not be able to change beneficiaries? The fact that it is term doesn't mean that it will always stay term if the policy has convertibility provisions. The owner gets to make the decision.
Posted: Fri Mar 04, 2011 12:05 am Post Subject:
Finally, fjaru posts an implausible scenario: I'm the owner and you are the insured, if [the death benefit] gets paid to your estate . . ." That cannot happen unless "The estate of the insured" is specifically named as the beneficiary. I can hardly imagine this statement ever being recorded as the beneficiary. "My estate" would be more likely, although I never permit someone to do that, and it would be understood to mean the estate of the OWNER, not the insured. If there is no named beneficiary, contract language directs the proceeds to the owner
Max, EXACTLY!!! We are in complete agreement. Look at the quote from Ins Teacher:
If there are no living beneficiaries, it's up to the state. Most say the proceeds are payable to the insured's estate.
The thrust of my argument is that Ins Teacher is saying something that is incorrect. I know that it won’t be paid to the insured’s estate. I was pointing out why it wouldn’t make sense for it to be done the way Ins Teacher is claiming which is why I asked for documentation.
Add your comment