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Contesting a Life Insurance Beneficiary

Contesting a life insurance beneficiary usually occurs when:

  1. no beneficiary designation changes have been made despite a major life event
  2. an incorrect method of beneficiary designation change was used; or
  3. the beneficiary designation change effected by the policyholder was made due to forgery, fraud, undue influence, or coercion

How life insurance policies are paid

Usually, when the policyholder dies, the life insurance company will pay the proceeds to the designated beneficiary. If the designated beneficiary has predeceased there is no alternate beneficiary, the estate will receive the proceeds.

Types of life insurance policies

How you dispute the designation of a life insurance beneficiary is strongly affected by the type of life insurance policy the policyholder has. If the life insurance policy is a private policy that the policyholder procured, this is usually governed by New York law. However, if the life insurance policy was acquired due to employment, this policy is governed by federal law, the Employee Retirement Income Security Act (ERISA) of 1974.

Private life insurance policies vs. ERISA policies

New York state law, under EPTL 5-1.4(a)(1), automatically revokes a designation of the ex-spouse as beneficiary, unless provided by the express terms of a governing instrument (i.e., the settlement and divorce decree). ERISA policies, on the other hand, mandate the strict observance of a beneficiary designation.

Given these differences, if the life insurance policy is a private one, it is governed by state law. In New York, if you designated your ex-spouse as a beneficiary and no divorce decree or settlement requires you to maintain that beneficiary designation or to grant your wife a part of the proceeds in that policy, the mere fact of divorce automatically revokes the beneficiary designation of your ex-spouse, even without any overt act from your end in revoking such designation. If you do not have an alternate or contingent beneficiary, the proceeds of the life insurance policy will go to your estate. If the life insurance policy, however, is governed by ERISA, there will be no automatic revocation of your ex-spouse’s beneficiary designation. If you forget to change your beneficiary designation after your divorce, your ex-spouse will receive the proceeds of the ERISA policy.

Contesting a life insurance beneficiary in cases of major life events

As previously mentioned, when a life insurance policy is not updated after divorce, the new spouse usually contests the designation of the ex-spouse in the life insurance policy. The outcome of this dispute will depend on whether the policy is ERISA-governed or state law-governed. An ERISA-governed policy will respect the beneficiary designation of the ex-spouse, regardless of the automatic revocation clause under New York law. For this reason, it is always a good idea to update your insurance policy after every major life event, such as divorce or adoption.

Contesting a life insurance beneficiary when beneficiary designation changes were incorrectly made

Can a policyholder change a beneficiary designation by virtue of a last will and testament? New York courts have declared that the policy’s terms regarding how to effect the change will control, and the policy’s terms supersede any beneficiary designation change using a will. In McCarthy v. Aetna Life Ins. Co, 92 N.Y.2d 436 (1998), the Court held:

“The question raised by this appeal is whether a decedent insured may effect a change of the designation of beneficiary on a life insurance policy by means of a testamentary disposition when the policy sets out another procedure for changing beneficiaries. We hold that under the circumstances of this case, he may not.”

Contesting a life insurance beneficiary due to fraud, forgery, undue influence, or coercion

Generally, life insurance beneficiary designations can be contested in the same way wills are contested: when fraud was employed upon the policyholder to change the beneficiary designation, when there was undue influence upon a mentally weak policy holder, or when a policyholder has been morally or physically coerced to effect the beneficiary change.

Although fraud, undue influence, and coercion are typically more difficult to prove, New York courts will consider the totality of the circumstances to see whether there is ground to set aside the beneficiary designation. The combination of two or more grounds can render your case stronger. For example, when both fraud and undue influence have been employed upon the policyholder to affect the beneficiary designation change, courts may set aside such designation.

Interpleader proceeding

If you wish to contest the life insurance beneficiary designation, it is best to contest it immediately when the policyholder dies and before the proceeds are transmitted to the beneficiary. Life insurance companies do not like to commit the mistake of releasing the proceeds to the wrong beneficiary and will usually file an interpleader action, allowing the company to deposit the proceeds with the court, and the competing beneficiaries to assert their claims before the court.

If you are involved in a beneficiary dispute for a life insurance policy, we at the Law Offices of Albert Goodwin are here for you. We have offices in New York, NY, Brooklyn, NY and Queens, NY. You can call us at 718-509-9774 or send us an email at attorneyalbertgoodwin@gmail.com.