Alzheimer's and life insurance

Posted: Wed Feb 18, 2015 11:16 am Post Subject:

Anyone can challenge anything they want. And challenging an insurance contract beneficiary statement is one of the most difficult to overcome, but not impossible. Unfortunately, I do not have the benefit of seeing the will you describe, and what you are claiming may not be what the will actually states. The will might not be discussing the life insurance at all, but the other assets of Grandmother's estate instead. That's exactly what most wills do -- they don't normally talk about life insurance proceeds, they talk about other personal property Grandmother has left behind.

Most, but not all, wills are drafted by attorneys who should understand that a will cannot dictate what happens to life insurance proceeds which exist outside the testamentary estate, as is the situation you seem to describe. They would counsel their client to restate the life insurance beneficiaries as "per stirpes" if the intent was to pass one child's portion to his/her own children if he/she should predecease Mother. A good life insurance agent will know this and advise a client to do the same. I do this frequently.

In this case, you have a situation in which someone may have done one thing in an insurance contract -- which is a NON-PROBATE asset -- and may have done a conflicting thing in her will -- which is a PROBATED document . . . and, like oil and water, the two do not mix. It would not be the first time this has happened. And it could be grounds for a legal malpractice lawsuit instead of challenging a life insurance beneficiary. It could also be grounds for an "Errors and Omissions" claim or lawsuit against an insurance agent (the equivalent of legal malpractice by attorneys). Either of those could be an easier case to win -- and far less costly on several accounts. Attorneys and insurance agents usually have insurance to cover such claims, and those insurance companies often write checks to avoid long and costly legal battles.

Grandmother's life insurance company is bound by the terms of its contract with Grandmother, and cannot act based on the instructions in her will, even if those instructions are clearly in conflict with the beneficiary designation they were given. The Probate Court has no power to reform an insurance contract to match the intent of the will, because the insurance contract does not come before the Probate Court for adjudication when there is a surviving beneficiary named "per capita."

Normally, the insurance contract is held to be inviolate. But you can certainly challenge the distribution of the proceeds . . . and you will create a situation that may have longer lasting consequences within your extended family than you can imagine today.

By challenging the beneficiary, you will force the insurance company to file a "complaint in interpleader" in federal court. The insurance company will get to take $5000-$6000 or more directly from the policy proceeds as compensation for its "legal fees" -- so right off the bat, money will be lost to the insurance company that was never intended to get anything other than premium dollars.

Then everyone will have to be represented by federal bar-admitted attorneys, which will cost either $300-$500 per hour or 30% to 40% of the death benefit recovery. So now up to half of the money could end up in the hands of the insurance company and attorneys, something Grandmother certainly never intended to happen.

But, if the will actually states that Grandmother wanted her life insurance policy proceeds to remain divided in each of her two children's columns, and not pass from a deceased child's column into the column of the surviving child, then the Federal Court has the power to say, "We see that this was Grandmother's intent, and we will honor her intent," and divide the money accordingly.

If the life insurance amount is millions of dollars, you might want to do this. If we're talking about $250,000 or less, in my opinion, you are wasting your time and money. After everything is said and done, even if you were to "win," you would end up with only about $70,000-$80,000 out of $250,000, not $125,000.

But the Federal District Court is not obligated to do this based on any Supreme Court ruling, and not all federal courts follow this practice.

There are some recent cases involving ERISA-governed life insurance and retirement benefits where the courts have looked to the decedent's intent and said that he/she "substantially complied" with efforts to change a beneficiary without actually having completed the process, but that is probably not the case in your situation. Those cases are merely instructive of how the courts give consideration to a person's intent, and might not be considered by the court as relevant in your case.

If you want to challenge the life insurance beneficiary, you are facing an uphill battle in which there will be no winners within your family, and you risk every possibility of losing and being forced to pay for everyone else's attorney fees -- could you afford that? It could amount to $40,000-$50,000 or more.

No matter what ultimately happens, everyone will lose something of value, and what you may lose most of all is the love and affection of the other extended family members who will also be forced by your actions to give up money to the insurance company and attorneys. The animosity an event such as this creates is almost never curable, and families remain divided for generations to come. If that's OK with you, then I guess you know what to do.

Going back to the will itself, however, if it clearly indicates that Grandmother's desire was for each of her children's children to receive a portion of her life insurance money, then I think the best course of action is to get everyone together in a family meeting, perhaps with a neutral third party as mediator, and try to work something out between yourselves privately. The "sole beneficiary" can legally "disclaim" a portion of the insurance proceeds and allow the insurance company to pay that portion to someone else. By doing this, everyone avoids legal fees and taxes, the insurance company and attorneys don't get any of the money, and the extended family remains intact.

Carefully consider what you want to do and if you choose to challenge the beneficiary, then you must obtain experienced legal advice from an attorney who has actually tried at least one interpleader action in federal court before you act in haste and set into motion a sequence of events from which there will be no real satisfaction.