The Common Disaster Problem in Life Insurance

Where the beneficiary and the insured die in a common disaster, the disposition of the proceeds is generally governed by the Uniform Simultaneous Death Act (USDA) which has now been enacted in some form in almost every state. The general rule is as follows: 

Where the insured and the beneficiary die and there is no sufficient evidence that they have died in a manner other than simultaneously, the proceeds of the policy shall be distributed as if the insured survived the beneficiary.

The USDA does, however, specifically allow the policyowner to override that result in the policy’s beneficiary form by making a presumption of a reverse simultaneous death (as if the insured was survived by his or her beneficiary).

Planners should note that policyowners may use such a clause may to reduce federal estate taxes by fully utilizing the surviving spouse’s unified credit.

The USDA will not apply if:

1. there is evidence that the insured and beneficiary died other than simultaneously; or

2. one of the parties did in fact survive the other for any length of time no matter how short.

The problem here is that if the named beneficiary survives for even one minute the proceeds are paid to his or her estate and pass under the deceased beneficiary’s will (if a valid will exists, otherwise by intestate law) and not necessarily to the person the policyowner-insured wanted to benefit.

One solution is a time (or “delay”) clause. This requires the beneficiary to survive the insured by a given period of time, such as thirty or sixty days, before he or she will be entitled to the proceeds. Beware, however, of a time delay clause lasting for more than 180 days as this may cause the loss of the federal estate tax marital deduction. A simple and practical solution is for the policyowner to elect a settlement option and name contingent payees to receive any proceeds not payable to the primary payee at his or her death. The insurance contract itself will provide the mechanism for payments to continue with almost no delay or cost at the death of the primary payee.

Reproduced with permission.  Copyright The National Underwriter Co. Division of ALM

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