Inheritance Nightmares: The Unchanged Life Insurance Beneficiary Form

                  Whether people fail to create an estate plan or sometimes even when they do, there a host of reasons why the plan or lack thereof can be a disaster.  This article will provide an example of an actual estate planning disaster.

Early in my career as an inheritance lawyer O’Fallon, Missouri, I worked at a small law firm in New Jersey.  Our office did a lot of divorce law.  A prior divorce client was able to obtain full custody of her young daughter and escape a pretty abusive marriage.

When the divorce was finalized, our office would always send a form letter explaining it was wise to change any estate planning and also things like life insurance beneficiaries.  The idea was that most people may not recognize that if they had their ex-spouse listed on a life insurance policy, the ex-spouse would still receive the proceeds of the policy if the client were to pass away.

This particular client had a very good job as an actuary and one of her benefits was a standard life insurance that she could pay extra to add term life insurance.  She made that election and at the time of her divorce the policy coverage was $1.5 million.

A year or so after her divorce, the client discovered that she had aggressive brain cancer.  She took a leave of absence from her work and within six months or so she passed away.

Her family was understandably worried about an inheritance for their granddaughter and contacted our law firm about a life insurance policy which the client had said before she got sick.  Prior to her death, she said she had changed the beneficiary to her parents, to hold the money for daughter’s needs.  When I looked into the policy there was a huge problem:  Ex-husband was still the beneficiary on the policy.  The change of beneficiary had never occurred.

As we later found out, about a year after the divorce, client had filled out paperwork to change the beneficiary to her parents.  However, her company’s policy was that the change had to be submitted through her HR Department.  Apparently the form got lost, the beneficiary was never changed and the ex-husband was still listed as the beneficiary.

A life insurance policy is a contract.  You could list your worst enemy as a beneficiary and when you pass your worst enemy will receive the proceeds, regardless of what you intended or what your estate plan says.

Eventually, our firm was hired to file suit on the basis that client’s intent was clearly to not have ex-husband to be the beneficiary.  We had some emails and the beneficiary change form to support our argument, but we knew it would be an uphill battle.

After two years of litigation (I had left the firm in the middle of the case), the two sides were able to settle on $1,000,000 for the husband, $500,000 for the young daughter.

Bottomline:  Who you want to inherit your things can change over time for a variety of reasons.  Divorce is clearly one of them.  Changing beneficiary forms is very important if they do not meet your wishes for inheritance provided to the right people.   It’s important to remember that when you are changing beneficiaries that you see it through.  That may not have mattered in this case because the HR Department screwed up, but on the other hand, it could have made all the difference for the young daughter.