A recent decision emphasizes the importance of recognizing the named beneficiaries of your accounts and policies and updating them as necessary in a timely manner.
In Northwestern Mutual Life Insurance Co. v. Rafi (October 19, 2010), a father had purchased two life insurance policies, one for each of his sons, Raymond and Robert, each with a death benefit of $500,000. Each policy was owned by one son and named the other as beneficiary. Raymond was married seven years after the policies had been purchased. Less than a year later, Raymond and his wife, Rafi, had a child, Evan. One year after Evan was born, filed a petition for dissolution of marriage. During the divorce proceedings, the parties negotiated the terms of a Marital Settlement Agreement (the “Agreement”). The last negotiated Agreement included the following relevant provisions, which the parties had agreed upon:
“Life Insurance — Each party will maintain a life insurance policy with a death benefit of at least $250,000.00 naming the minor child as the only irrevocable beneficiary.”
“…this Agreement and all of its provisions shall be incorporated into any such Judgment for Dissolution of Marriage, either directly or by reference, and upon entry of said judgment, this Agreement shall come in full force and effect but in no event shall this Agreement be effective or of any validity unless a Judgment for Dissolution of Marriage is entered in the pending case referred to hereinbefore…”
While the settlement negotiations were ongoing, Raymond was killed in a car accident. Following Raymond’s death, Rafi contended that Evan was entitled to the proceeds of the life insurance policy pursuant to the last negotiated Agreement, even though Raymond was named as the beneficiary on the policy. Northwestern Mutual was caught in the middle and appealed to the court.
The court determined that there was no binding agreement between Raymond and Rafi because “there is no contract until the formal document is executed.” Since the Agreement was not executed and no Judgment for Dissolution of Marriage had been entered, Raymond and Rafi were still legally married at the time of Raymond’s death, and the Agreement was therefore ineffective. Additionally, the court found that Illinois law does not impose a duty on Raymond to support his minor child after death.
Raymond may have fully intended to support Evan in case of his death. On the other hand, he may have only intended to do so with the insurance policy if required by the Agreement. Regardless of his intent, the court was forced to rely on the documented beneficiary designation on the policy.
When personal or financial circumstances change, it is crucial to confirm ownership and beneficiary designations of accounts and policies and update them as necessary. As we have seen, the consequences can be significant.