Pat is insured with a life insurance policy and Karen is his primary beneficiary. They are both involved in an automobile accident where Pat dies instantly and Karen dies 5 ?days later. Which policy provision will protect the rights of the contingent beneficiary to receive the policy benefits?
Nonforfeiture clause
Common disaster clause
Spendthrift clause
Accident indemnity clause
The correct answer and explanation is:
Correct Answer: Common Disaster Clause
The Common Disaster Clause is a provision in life insurance policies that helps determine how benefits are distributed when both the insured and the primary beneficiary die as a result of the same event or within a short period of time. In this scenario, where Pat (the insured) dies instantly in an automobile accident and Karen (the primary beneficiary) dies five days later, the Common Disaster Clause becomes relevant.
Explanation:
- Purpose of the Common Disaster Clause:
The clause ensures that the contingent beneficiary (the person designated to receive the death benefit if the primary beneficiary cannot) is not unfairly disqualified from receiving the benefit due to the timing of deaths. Without this clause, if the primary beneficiary (Karen) outlives the insured (Pat) by any length of time, even a few days, the death benefit would typically pass to Karen’s estate rather than to the contingent beneficiary. - How It Works in This Scenario:
- Since Karen dies within a specified timeframe (usually 30 to 60 days, depending on the policy) after Pat’s death, the clause treats the primary beneficiary as having predeceased the insured.
- As a result, the death benefit bypasses Karen’s estate and is paid directly to the contingent beneficiary named in the policy, preserving their rights.
- Importance for Policyholders:
This provision protects against complications arising from simultaneous or near-simultaneous deaths, ensuring that the policy benefits are distributed according to the insured’s original intent. It avoids potential legal disputes and ensures clarity in the disbursement of funds. - Comparison with Other Options:
- Nonforfeiture Clause: Protects the policy’s value if premiums lapse.
- Spendthrift Clause: Restricts how beneficiaries can use the funds.
- Accident Indemnity Clause: Provides extra benefits for accidental death.
Only the Common Disaster Clause directly addresses the rights of a contingent beneficiary in such circumstances.