Life Insurance Beneficiary Disputes
Many of the life insurance cases we handle involve disputes regarding who should receive the benefits.
Beneficiary disputes can be complex. In order to understand how these disputes work, it’s important to understand how a beneficiary is designated, what can lead to a dispute, and how designations can be challenged.
How beneficiaries are designated
Life insurance is considered a “non-testamentary asset”, because the proceeds are not controlled by a will.
Instead, the life insurance policy is a contract between the person who purchases the policy and the insurance company. Unlike most insurance, the policy isn’t for the person who purchases it - it’s for the benefit of a third party, like a spouse or child.
Who receives the policy benefits isn’t determined by a will. The owner of the policy names who will benefit from the policy, which is usually defined in the insurance contract - not a will. The person named (or designated) in the policy is called the beneficiary. This beneficiary will receive the life insurance payout upon the insured's death.
However, a designation may fail or be successfully challenged for various reasons.
Why designations fail
A policy holder will get divorced but forget to change the policy designation from the prior spouse.
It can be proven that the benefits were promised or pledged to someone other than the named beneficiary or the insured made efforts to change the designation.
The named beneficiary may have done something to prevent their recovery of the policy proceeds.
The insured will attempt to change a designation, but fails to do so in the manner prescribed by the insurance company. The insurance company may reject the effort and ask the insured to make the designation on the form and in the manner required by the company.
Under Texas law, a beneficiary designation is effective if it is in “substantial compliance” with the insurance company’s procedure, which has been defined as the insured’s doing all that he could reasonably have done to effect a change.
Federal courts apply a similar standard in ERISA cases.
In disputed cases, the insurance company will often seek a ruling from a court to determine the rightful beneficiary.
Beneficiary designations can be challenged on the basis that the insured either lacked the mental capacity to make the designation or was unduly influenced to do so. The evidence necessary to prove such claims is very similar to that in a traditional will contest.
A key issue to determine is whether Texas or federal law applies to the controversy.
Most policies are purchased by individuals through an agent, but many are purchased through an employer with group coverage.
Federal law, through ERISA, will often apply if the policy was purchased through an employer. In such cases, you need an attorney experienced in handling ERISA cases.
We have handled beneficiary disputes pertaining to individually purchased policies, ERISA group policies, SGLI military policies, and FEGLI federal employee policies.
It’s important to take action now
Sometimes a beneficiary dispute can be resolved before it heads to court. If you are involved in such a dispute, please contact Texas Life Insurance Lawyers as soon as possible.
Consultations are free and confidential.
This article was written by Texas Life Insurance Lawyer J. Michael Young.
Mr. Young is a recognized authority in handling life insurance disputes.
You can read more about this topic in an article he has published on the Dallas Bar Association website: Recognizing Life Insurance Beneficiary Disputes.