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Dear Customer, I am sorry to learn of this unfortunate passing. Insurance policies are matters of contract, meaning the insurance carrier is required to pay out the benefits exactly as the terms of the policy require. This means that if the beneficiaries are not changed, the benefits will be paid to the beneficiaries as they were originally identified when the policy was purchased.
To check and make sure that the benefits were actually paid out the way they were supposed to be, get a copy of the policy itself (the carrier should give one to you), and review the terms carefully regarding payment of the benefits.
There must be terms as to how the benefits are paid out. Without this, the insurance policy would require that the benefits go to the child's estate.
Do they have a definition of parents? (these types of contracts require a review of the entire document, there may be something else there). In addition, there are various ways of "signing off" parental rights, was there a court order?
Signing off your parental rights in that manner is not legally binding, while it may create a strong inference of the parents' intent, it is not enforceable in a custody dispute should the non-custodial parent wish to contest it. The other parent is still legally a parent of the deceased child. It is unlikely the insurance carrier is willing to face liability in a potential dispute from a parent with a legal entitlement despite this documented intent to the contrary (the first is enforceable, the other is not).
You are correct, the principle may be unfair, but as a legal issue, that is where it falls (I am sorry).