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Can you dispute a life insurance beneficiary?
Let’s say your husband never updated the beneficiaries on his life insurance policy to reflect your marriage. When he died unexpectedly, his first wife and their children were the only beneficiaries named on the policy. You and your children were not. Can you dispute this?
"There are some limited situations where a life insurance beneficiary can be disputed and, if you do, you should seek legal advice," says Marvin Feldman, president and CEO of the Life and Health Insurance Foundation for Education in Washington, D.C., a nonprofit organization that educates the public about insurance planning and decision-making. Life changes such as marriage, divorce, remarriage, the birth of a child or an adoption are the most common reasons for life insurance disputes, Feldman says.
Another common situation leading to a life insurance beneficiary dispute is a case in which a seriously ill policyholder makes a change in his/her beneficiaries toward the end of his/her life. Partners or other family members who are left out may claim that the policyholder wasn't of sound mind when making the latest changes. They believe the newly named beneficiary may have taken undue advantage of the policyholder and convinced his/her to change the policy.
Legal odds against those disputing life insurance beneficiaries
Whatever the reason, when a life insurance policy is disputed, it becomes a legal issue and a matter for the courts to decide, says Feldman. "The life insurance companies can never decide for themselves whether the family member's or challenger's claim is legitimate and the beneficiaries should be changed. Only the courts can make that decision." After hearing the evidence, the court may decide to uphold the originally named beneficiaries or it could agree that the beneficiaries were legitimately updated. "In the end, the insurance companies that issued the policies are going to go by whatever the court tells them," Feldman says.
In most cases, according to Feldman, it is not easy for those disputing beneficiaries to prove their case before a judge. An insurance policy is considered a signed contract that is irrefutable. It can be particularly difficult to prove fraud – that the policyholder was coerced into changing a beneficiary by someone who only came into his or her life toward the end.
Life insurance beneficiary disputes can drag on, become costly
Not only can disputing a beneficiary -- like disputing a will -- be legally difficult, but it also can turn very costly and time-consuming, warns Feldman. While the case is in dispute, the life insurance companies place the payout in a trust held by a state court. In the meantime, "the estate stays open and fees accrue and taxes accrue and penalties accrue," he says. "It can become an exceedingly expensive situation."
For that reason, Feldman says that cases may go to mediation or arbitration. "It's far less expensive to use that type of settlement than to take it to court, and, even if you take it to court, you may not be on the winning end." The two parties often work out an agreement and split the proceeds rather than fight a lengthy court battle over the life insurance beneficiaries and watch the payout evaporate in legal fees.
Avoid disputes by keeping life insurance policies up to date
Because challenging beneficiaries is not easy and someone can end up disappointed and bitter, it's best to head off disputes before they start. Feldman recommends reviewing your life insurance policy on a regular basis: "You should have a life insurance agent, and he or she should stay in touch with you to make sure your policies adequately reflect your needs, especially when you have a life change."
It's particularly important to have witnesses when you want to make what some might see as a controversial change. "The policyholder can do whatever he wants," Feldman says, but gathering witnesses could save trouble later if he tells those involved of the changes he's making. It would be harder for people to dispute changes in beneficiaries if the policyholder made it clear he knew what he was doing when he made them, Feldman says.
"Make sure your professional advisers are made aware of why you made those decisions so when they're questioned, there's someone who understands the background,” Feldman says. “That doesn't mean the beneficiaries still can't contest it -- and if there's money involved, they might -- but it will make it more likely that your true wishes are confirmed."
More from Beth Orenstein here