When the unthinkable happens: What if your beneficiary passes before you?
It’s rare, but it can and does happen
Even though no one really want to think about such things, we address the potential challenge because when a beneficiary passes before the insured, it can create a complex and possibly contentious situation. Moreover, the specific outcomes can vary significantly depending on local laws and regulations.
Fortunately, we seldom see the scenario in which a beneficiary passes before the person insured, but it does occasionally happen, and the risk increases with the age of the beneficiary. So, PCS by Mercer always endeavor to put contingencies in place when we are incepting or reviewing a client’s policy. We do so irrespective of the client or their beneficiary’s age.
How do you plan for it at policy inception?
Many life protection solutions allow for the designation of "contingency beneficiaries" who will receive the death benefit if the primary beneficiary is deceased. This can mitigate the risk of the benefit going to unintended recipients.
We note in some jurisdictions, if you don’t designate a contingent beneficiary on your life insurance policy and the primary beneficiary passes before you, the death benefit goes to your estate when you yourself pass. The executor of your estate will then distribute the proceeds along with the rest of your estate.
For this reason, as part of wealth planning, we also advise clients to undertake estate planning with their legal advisors and beneficiaries. A well-crafted estate plan may help to avert potential issues such as naming alternate beneficiaries who are more likely to survive the insured. For example, a client might name her married child as the primary beneficiary, and her grandchildren from the marriage as contingent beneficiaries, and in doing so, segregate the life insurance proceeds from being considered as part of her child’s martial assets.
Some clients opted to stipulate multiple beneficiaries, such as all of their children and grandchildren. In such cases, we would ask them to consider whether the beneficiaries should receive the benefit jointly or in separate shares. We note, if a minor is named as a beneficiary, a guardian or custodian will need to be appointed to manage the funds.
What happens if you don’t make contingencies at policy inception?
The most important thing a HNW client can do after incepting a policy is to review that policy with a consultant either yearly or bi-yearly. The reviews are opportunities to rectify any issue arising from change as well as a chance to make plans for new contingencies.
PCS by Mercer prioritize life insurance policy reviews because lives do change, even in small, nuanced ways, and reviews offer the option to address any changes in a timely manner. Regularly reviewing the beneficiary designations in your life insurance policy is crucial to ensuring that they align with your latest estate plan and family circumstances. Your intent of gifting can evolve in unexpected ways, and a conversation with a PCS consultant can help to clarify things.
Empirically, roughly 10% of HNW clients a year in PCS Singapore will make changes to their policies at a review meeting, including changing beneficiaries, modifying the solution mix, and changing their coverage.
What are some other key considerations and risks that HNW clients need to be aware of?
- Jurisdictional Differences: We note there are different rules in different jurisdictions. From a Singapore perspective:
Per Stirpes: If a beneficiary passes before the insured, their share of the death benefit is divided among their children or descendants. This is known as "per stirpes" distribution.
Per Capita: The death benefit is divided equally among the surviving beneficiaries, regardless of their relationship to the insured. This is known as "per capita" distribution.
- Estate Taxes:
The benefit may be subject to estate taxes, depending on the value of the estate and local laws.
By carefully considering these factors and consulting your legal and tax advisors, you can help ensure that the benefit from your life insurance policy is distributed according to your wishes, even if a beneficiary predeceases you.
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is the Managing Director of PCS by Mercer Singapore. Lee joined in early 2024 from Howden Private Wealth. A qualified STEP member, Lee is renowned in the insurance and wealth management industry, bringing more than thirty years of experience to his role.
Lee began focusing on HNW insurance at Aon Private Risk Management, where he worked closely with major private banks serving client in the SE Asia market. In 2010, he joined IPG Singapore as a Senior Consultant and following significant successes, he was appointed Head of Malaysia in 2019 to set up Howden’s Malaysia onshore office.