Not Updating Your Beneficiaries Can Be Costly
Thursday, May 22, 2014

Much of the conversation about investing focuses on how to realize capital gains and portfolio income, but staying on top of the seemingly minor things is also very important. A court ruling earlier this month showed how seemingly minor missteps can have significant financial consequences. A widow was denied the proceeds from her deceased husband’s life insurance policy because the beneficiary information on the policy was never changed. The case is Hall v. Metropolitan Life Insurance Company.

Here is the summary of events. Dennis Hall obtained a MetLife life insurance policy in 1991 through his employer, Newmont. At the time, Dennis designated his son as the beneficiary. In 2001, Dennis married Jane Hall. In November 2010, Dennis filled out and signed a beneficiary-designation form naming Jane Hall as the sole beneficiary of his policy, but never submitted it. The failure to submit the form proved to be big mistake.

Dennis awoke partially paralyzed on January 26, 2011, and executed a will the next day. The will provided, according to court documents, that “the following specific bequests be made from my estate. Any and all life insurance and benefits shall be distributed to Jane Marie Hall. If this beneficiary does not survive me, this bequest shall be distributed with my residuary estate.” Dennis passed away the same day.

Newmont sent MetLife a copy of the 1991 beneficiary form, which was the most current one on file. Soon afterward, Jane sent MetLife a letter saying that Dennis had changed his will, but did not have enough time to get the approved form from the insurer to change the beneficiary. MetLife denied Jane’s request, explaining that the will had no bearing on a group life benefit.

Jane sued the insurance company and a federal court sided with MetLife, agreeing that “a will cannot directly dispose of a nonprobate asset.” Jane appealed. The 8th U.S. Circuit Court of Appeals upheld the decision rationalizing, in part, that “Dennis’s will addressed bequests from his estate. The estate was not a beneficiary of the policy, and Dennis’s will...did not expressly address the distribution of assets that were not part of the estate.”

The policy in question fell under the Employee Retirement Income Security Act (ERISA) guidelines. I cannot say how this ruling affects a policy taken out directly from an insurance company. I can say, however, that it shows just how important it is to ensure all of your beneficiary information is correct and up-to-date. Failure to update relatively simple documentation can inadvertently wreck years of good financial planning.

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The Week Ahead

The U.S. financial markets will be closed on Monday in observance of Memorial Day.

Just four members of the S&P 500 will report earnings: AutoZone, Inc. (AZO) on Tuesday; Michael Kors Holdings (KORS) on Wednesday; and Costco Wholesale (COST) and Pall Corp. (PLL) on Thursday.

The week’s first economic reports will be April durable goods orders, the Conference Board’s May consumer confidence survey and the March S&P Case-Shiller home price index. All three will be released on Tuesday. Thursday will feature the first revision to first-quarter GDP. April personal income and spending, the University of Michigan’s final May consumer sentiment survey and the May Chicago PMI will be released on Friday.

Five Federal Reserve officials will make public appearances. Outgoing Cleveland president Sandra Pianalto and incoming Cleveland President Loretta Mester will speak on Thursday. Richmond president Jeffrey Lacker, Philadelphia president Charles Plosser and San Francisco president John Williams will speak on Friday.

The Treasury Department will auction $31 billion of two-year notes on Tuesday, $35 billion of five-year notes and $13 billion of two-year floating rate notes on Wednesday and $29 billion of seven-year notes on Thursday.

Local Chapter Meetings

AAII Local Chapter Meetings offer you a variety of presentations from expert speakers who will give you their view on the world of investing. A bonus of attending a Chapter Meeting near you is the opportunity to meet other AAII members who share your interest and enthusiasm for investing. You can even share the Chapter experience with your family and friends by inviting them to attend Chapter Meetings with you!

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AAII Sentiment Survey

Neutral sentiment stayed above 40% for the fourth consecutive week in the latest AAII Sentiment Survey. This is the first time we have seen such a streak since the summer of 1998 (June 25 through July 16, 1998). Bullish sentiment declined this week, while bearish sentiment rebounded.

Bullish sentiment, expectations that stock prices will rise over the next six months, fell 2.7 percentage points to 30.4%. The drop keeps bullish sentiment below its historical average of 39.0% for the 10th consecutive week.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, declined 1.1 percentage points to 43.2%. This was the first decline in neutral sentiment in six weeks. Nonetheless, neutral sentiment remains above its historical average of 30.5% for the 20th consecutive week.

Bearish sentiment, expectations that stock prices will fall over the next six months, rose 3.8 percentage points to 26.4%. The increase was not large enough, however, to prevent pessimism from being below its historical average of 30.5% for the fifth straight week.

Unusually high levels of neutral sentiment have historically been followed by above-average market returns in the following six-month and 12-month periods. It should be noted, however, that the data used is from 1987 through 2003. Since that time, neutral sentiment reached unusually high levels only once (2013) before this year. I will have a more detailed explanation in a new analysis of the AAII Sentiment Survey I conducted for the June issue of the AAII Journal.

The unusually high level of neutral sentiment registered by the survey is reflective of the uncertainty many individual investors have about the short-term direction of stock prices. Optimism about the market’s resilience, economic expansion, the Federal Reserve’s tapering of bond purchases and low interest rates is being offset by the events in Ukraine, the slow rate of economic expansion, Federal Reserve tapering and frustration with Washington politics.

This week’s special question asked AAII members what they thought about the recent occurrence of the Dow setting new record highs and the 10-year Treasury bond yield falling back below 2.6% at the same time. Many opinions were given, ranging from calling bond yields unsustainable to viewing the stock market as reaching speculative levels. The largest number of respondents, about 18%, attributed the occurrence to the Federal Reserve’s quantitative easing policy. Slightly less than 15% of respondents described the rise in large-cap stock prices and the pullback in bond yields as either being odd or a mixed signal from the financial markets. Nearly 13% of respondents think a flight to safety is occurring.

Here is a sampling of the responses:

  • “Anxiety by investors has people looking for safety.”
  • “Something is askew. Probably the easy money policy.”
  • “It is being caused by the flight to safety due to headline news in Europe, the South China Sea, the Middle East and Africa.”
  • “It’s the result of quantitative easing. The end of quantitative easing will be a disaster.”
  • “I think it’s weird, but we ought to know by now that the markets (and people) are not rational.”

This week’s Sentiment Survey results:

Bullish: 30.4%, down 2.7 points
Neutral: 43.2%, down 1.1 points
Bearish: 26.4%, up 3.8 points

Historical averages:

Bullish: 39.0%
Neutral: 30.5%
Bearish: 30.5%

Take the Sentiment Survey.