Suffice it to say that, for all sorts of reasons, the one who is insured might outlive the person who they've named as a beneficiary. One spouse dies before the other, or parents outlive their kids. It's, obviously, sad, however it inevitably happens.
The question, then, is what transpires with the life span insurance plan? We've your responses.
The policy pays towards the contingent beneficiary
What is a contingent beneficiary? You can learn more here, but it's pretty much what you believe: A second (or third, or thirty-third) person named in your policy, who will be the beneficiary in case tips over towards the first (or second, or thirty-second) person you've listed.
In these cases, it's pretty straightforward. The contingent beneficiary files claims just like the initial beneficiary would've done.
If there isn't any contingent beneficiary, it's paid to the owner's estate
While this obviously isn't ideal, it's not as though the insurance company is taking a match to the policy (or making arbitrary decisions). Basically, the money is treated like anything else that was not explicitly down on paper (furniture, for instance, or perhaps your uncle's collection of rare polka LPs). The insurance policy would be paid towards the person named within the insured person's will; should there be nobody, it'll go to the estate, and laws vary by state regarding who'll get that.
But things can get complicated …
The above scenarios assume a relatively orderly sequence of events. Here are a few less frequent, though by no means rare, situations.
1. The beneficiary dies soon after the insured person does.
It could be a case of the items some call “broken-heart syndrome,” where mom dies per month after dad does. Or it could be a case where, both spouses were in a fatal car accident, only one spouse dies a couple weeks after the first spouse does. In these cases, the insurance policy could be paid out to the first beneficiary, after which that person's insurance policy could be paid out to their beneficiaries.
2. The beneficiary dies at the same time because the insured person.
Take the car accident example from above, but instead of one spouse dying a couple weeks before the other, both spouses die simultaneously. This really is termed a “simultaneous death,” and applies any time a beneficiary dies within Twenty four hours from the insured. (For obvious reasons, “simultaneous deaths” don't need to occur at the identical moment.)
In this example, it will vary state by state, since it is driven by state law (as opposed to the insurer's policy). It could move on to the contingent beneficiary or it might move into someone's estate.
3. The beneficiary is incapacitated by the time the insured person dies.
In that scenario, the insurance company will defer to the incapacitated person's power of attorney, and enable them to obtain the appropriate documentation. In other words, the insurance policy it's still paid based on the insured's wishes.
So, what does this mean for you? More than anything, this ought to be a reminder to regularly keep the policy current. Generally, we advise reviewing your policy annually to ensure things are accurate and current. People move, people marry or get divorced, company, people die. It is important that the policy reflects your newest reality in the event the worst happen. Taking out the policy was precisely the initial step in providing for family; taking care of the insurance policy may be the ongoing journey that follows.