A life insurance policy in California includes a 'Common Disaster Clause'. This clause is designed to address situations where the insured and the primary beneficiary die in the same accident, and it is unclear who died first. What is the primary purpose of this clause?
- ATo allow the insurer to delay payment of benefits until a court determines the order of death.
- BTo ensure the policy proceeds are paid directly to the insured's estate, avoiding probate.
- CTo prevent the policy proceeds from being paid to the primary beneficiary's estate if they did not survive the insured by a specified period.
- DTo increase the death benefit if multiple parties die in the same incident.
Show answer & explanationAnswer & explanation
Correct answer: C. To prevent the policy proceeds from being paid to the primary beneficiary's estate if they did not survive the insured by a specified period.
The primary purpose of a Common Disaster Clause is to ensure that if the primary beneficiary dies at the same time as, or shortly after, the insured, the proceeds bypass the primary beneficiary's estate and go to the contingent beneficiary or the insured's estate, as if the primary beneficiary had died first.
Why the other options are wrong
- A. This is incorrect. The clause is designed to provide a clear path for payment, often avoiding the need for court intervention.
- B. This is incorrect. The clause directs proceeds to a contingent beneficiary or the insured's estate, which may or may not avoid probate depending on the ultimate recipient.
- D. This is incorrect. The clause deals with the distribution of the existing death benefit, not its increase.
Common Disaster Clause (Life Insurance)
A provision in a life insurance policy that specifies how death benefits will be distributed if the insured and the primary beneficiary die in the same accident and the order of death is difficult to determine.
- Typically requires the primary beneficiary to survive the insured by a certain period (e.g., 10-30 days).
- If the primary beneficiary does not survive, proceeds go to the contingent beneficiary or the insured's estate.
- Prevents proceeds from being paid into the primary beneficiary's estate, which could lead to unintended distribution.
Memory trick: When disaster strikes and two lives are gone, the Common Disaster Clause ensures the right heir carries on.