20 Feb My husband died. Who should get his benefits?

Q. My husband died and I have concerns about the life insurance provided by his employer. Right after my husband died, I was told I was the only beneficiary of all his assets, including life insurance of $7,500. Then the company told me his sister was a beneficiary and they paid her. I never signed any waiver for this. He also apparently had company insurance for $200,000 with options to pay out at retirement or death. I was the beneficiary and the company told me if I would sign off on putting $80,000 of that in a trust for his unborn child (not my child) they would manage it and issue me a check for $120,000 and that it would not be taxable. I’m uncomfortable with this. What can I do?
— Wife

A. This sounds like trouble.

You’re going to have to do some legwork here.

Let’s start at the beginning.

A life insurance policy is a legal and binding contract between the policyholder and the insurance carrier, which agrees to honor the terms of that agreement and pay the proceeds to the named beneficiary of the policy upon the insured’s death, said Matthew DeFelice, a certified financial planner with U.S. Financial Services in Fairfield.

“That is the insurance carrier’s only legal obligation, regardless of whether the policy was a group policy provided by an employer or not, and the insured person’s marital status notwithstanding,” he said. “The carrier has no say in beneficiary selection or moral judgment in agreeing to someday pay that person the death benefit.”

That being said, we’re wondering why your husband’s employer initially said you were the beneficiary of the smaller $7,500 policy, but then said his sister was.

It is certainly possible that you were the initial beneficiary and somewhere along the line he changed it to his sister, DeFelice said.

“While this sounds like it may be a sensitive subject, I must ask – are you saying at the time of death your husband had an unborn child with another person? If your relationship was failing it is certainly possible and plausible that he changed beneficiaries before he passed away, and that would also be legally binding even if you were still technically married,” he said.

Additionally, the $200,000 “company insurance” you mention sounds like it may be some kind of retirement annuity, pension or deferred compensation arrangement, given that life policies typically pay the death benefit when the insured dies and do not give an option to pay it at retirement, he said.

“Most retirement plans governed by ERISA require spousal consent in writing to name a non-spousal beneficiary, but certain non-qualified plans that do not fall under ERISA guidelines may not,” DeFelice said, noting that we would need to know exactly what plans or policies you’re dealing with to say definitively.

If you’re not sure, get copies of the plans and policies and ask a financial professional to help you go through the details.

If it is another life insurance policy, the policyholder can decide who should receive a death benefit when he or she passes away, DeFelice said. Any assets that pass by way of beneficiary do not go through probate and supersede a will, so there is no automatic court scrutiny process that occurs, he said.

That doesn’t prevent someone from contesting life insurance retirement plan beneficiary payouts.

“Generally speaking, if someone believes that the policyholder’s choice of beneficiary should not be honored then they can raise a claim to dispute it,” he said. “However, this can be a lengthy and time-consuming process that involves hiring an attorney and contesting the beneficiary in court. Only a court decision can change who can benefit from a life insurance policy; the insurer is required to abide by the terms of the original contract.”

Whether your dispute is subject to state or federal law can depend on the policy, DeFelice said.

If, for example in your case, the life insurance policy was issued by an employer and is covered by ERISA guidelines, then federal law would apply, he said.

A lawsuit would need to be filed in the probate court that’s overseeing the disposition of the deceased person’s estate, and you would need to demonstrate to the court why your claim should be upheld, he said. The type of proof or evidence required to do so may depend on the nature of the claim. If you’re able to prove to the court that the change of beneficiaries shouldn’t have happened, then the court can order the life insurance company to uphold the original designations, DeFelice said.

“It should be noted that challenging a life insurance/retirement plan beneficiary designation is difficult, and it is rare that a third party can muster the proof to show that the beneficiary is the wrong one,” he said. “Absent disputing a claim, in most states, including New Jersey, the primary beneficiary will receive the full payout even if they’re not the current spouse.”

The only exception would be if your primary residence is in one of nine community property states, DeFelice said. In that case, he said, the surviving spouse may have a right to half the death benefit. The insurance company will divide the payout between the named beneficiary and the spouse depending on the laws for that state. Community property rulings usually split the payout equally between the beneficiary and the spouse, he said.

The community property states currently are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.
“For your own peace of mind, I would inquire with your husband’s employer and question when things changed and see if you can get any information that way,” he said. “I would certainly ask for more details about the $200,000 proceeds, and find out exactly what type of benefit that is.”

Once you have additional specifics you would need to consult a qualified estate attorney if you want to take things further and dispute any claims, he said.

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This story was originally published on Feb. 20, 2023.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.