Dependent Life Insurance

[luissaha]

Is there any legal requirement that an employee must be the beneficiary on a dependent life insurance policy?  I see this in many policies and I'm not sure why this is the case.  I have a situation where an employee designated his children as beneficiaries on the policy on his spouse's life.  The employee made this designation on the dependent life insurance enrollment form provided by the insurer.  The insurer did not object to the designation when originally made.  Unfortunately, the employee's spouse passed away recently and the insurer is now saying it will not pay the children because the policy language requires the proceeds to be paid to the employee.  I think if the insurer accepted the designation, they must pay the designated beneficiaries, even if that conflicts with the terms of the policy.  The only reason I can see for not paying the children is if there is some legal prohibition against naming someone other than the employee as a beneficiary on a dependent life policy.  Any insight would be appreciated.

[Belgarath]

53 minutes ago, luissaha said:

I think if the insurer accepted the designation, they must pay the designated beneficiaries, even if that conflicts with the terms of the policy.

My gut reaction is just the opposite - I'd say the policy provisions override a beneficiary designation that is, under the legal terms of the policy, invalid. Now, I'll defer to the lawyers here who will have more informed opinions.

[Belgarath]

FWIW, I posed the following to a friend who was a senior claims examiner for many years at a major insurance company:

Suppose you had a policy (sold in a Section 125 cafeteria plan) that by its legal terms stated that the death benefit on a spousal insurance policy (not on the employee) could ONLY have the employee as beneficiary. The spouse incorrectly fills out the beneficiary designation naming the children as beneficiaries, and the insurance company doesn’t notice. Insured then dies. 

Do you pay the employee? Or are you bound by the beneficiary designation? Or if someone sues on behalf of the children, do you file an interpleader motion and let the courts decide? It seems to me that the legal policy terms override the bene designation, although possible that a legal challenge might survive this presumption.

Here's his response, and I stress that this is just an off the cuff response to a friend, not in any way a formal discussion of the issue. (As you can see, I wasn't quite accurate in my question to him, as it is the EMPLOYEE who made the incorrect beneficiary designation. But I don't think it alters the basic premise.)

First, for the situation that you describe, I would not think there would even be a beneficiary form available to be filled out.  However, my initial reaction is that the contract would dictate and the benefit would be payable to the employee.  I don’t think you would be bound by the bene designation, since it sounds like the spouse had no right to make the election.  In the event that a legal action was pursued an interpleader is often used to avoid the cost and time to the company and it at least shows a willingness to make payment of the benefit in good faith.

[david rigby]

Are the children minors?

(Don't know if it's relevant. Just asking.)

[luissaha]

One child is (age 17).  Thanks for the responses. They are helpful.  I think we may just explain to the employee that the beneficiary designation should not have been accepted because of the language in the policy requiring him to be the beneficiary.  We'll ask him to apply for the benefits and see how he reacts. 

[Sandra Pearce]

Our company has had dependent life insurance available for employees for the past 25 years with many different carriers over those years.  All of our contracts were written with the employee as the beneficiary for all dependent life insurance, spouse and/or child(ren),  It is possible the form filled out was actually a combination form for Voluntary Employee Life Insurance - requiring a beneficiary - and Dependent life insurance.  Meaning the employee, when filling out the form, believed the beneficiary was applicable to both the employee and dependent life elections.  Like one of the other posters I have never seen a dependent life insurance election form with a beneficiary named.

[Albert F]

Dear Luissaha,

           It is not clear why the participant/employee would care whether the beneficiary is the employee or the employee’s children. 
         •    If the employee were rich, the employee could be concerned about a unified gift and estate tax liability from the transfer. However, for federal tax purpose this would require an individual to expect to transfer $5,490,000, and a married couple to transfer twice this amount.  It may be that the participants resides in a state in which the state tax levels are much lower.
      •    If the employee were poor, the employee could be concerned about his creditors having a claim to the property that under the local fraudulent transfer rules the employee could not transfer the funds to the employee’s children.
          There is no legal requirement that the beneficiary of dependent life insurance be the participant/employee.  However, life insurance companies/brokers often offer dependent life insurance in relatively small amounts as an inexpensive add-on to an employee group life insurance product that is being offered to an employer.  This inexpensive goal is achieved if the beneficiary must be the employee.  If the employee could make beneficiary choices the insurer would have to incur the cost of maintaining a beneficiary designation file for each of the policies. If beneficiary choices are permitted, there can be disputes about the validity of a designations, which again impose costs on the insurer. Thus, most insurers do not permit employees to choose a beneficiary, but instead make the participant the beneficiary.

             It is thus likely that Ms. Pierce is correct and the employee completed a designation for the employee’s life insurance, and confused that designation with a designation for the dependent policy.  
            Nevertheless, there may be a dependent life insurance beneficiary designation. There is often a distinction between an ERISA plan that provides group life insurance and the group life insurance policy. That is why the plan may stay in existence despite changes in the insurer.  If there is such a distinct plan document, it is important to check whether there are plan terms that are inconsistent with the underlying policy.  If there is such an inconsistency, it would appear that the plan administrator would be responsible for following the plan terms, such as permitting beneficiary designations, even if the plan administrator did not obtain a policy conforming to the plan terms.  Plans often name the insurer as the plan administrator, but that designation is only effective if the plan must be associated with such insurer, which we are assuming is not the case.

             Best wishes,

            Albert