For families going through a tough period, a life insurance payout can be a valuable financial resource but does it have to go through probate first?
Maybe. Whether a life insurance policy payout moves through probate is determined by a variety of circumstances, including whether the policy has any designated beneficiaries, whether these people are still alive, and whether the policyholder wanted the payout to pay off debts due by their estate.
If the beneficiaries of your life insurance policy are still living when you die, the payout is not considered part of your estate and will not be probated. Rather, the money will be distributed to your living beneficiaries.
Is life insurance part of deceased estate?
Life insurance proceeds, in most cases, go directly to the named beneficiaries and are not considered probate assets.
Death benefits payable under your life insurance policies are not estate assets unless they are payable to your own estate, which means they do not go according to your Will and sometimes go to the “wrong people.”
When you die, the money paid out on your life insurance policy is not “your” money. It is the money of the insurance company, which has a legal obligation to pay the named beneficiary under the contract. As a result, that money is not part of your estate, and you have no control over who receives it through your Last Will and Testament. You choose who gets it by naming a beneficiary in your initial application, and you can only alter that beneficiary by filling out and submitting a “change of beneficiary” form to the insurance company.
The sole exception is if the insurance policy is due to “your estate” or if the only specified beneficiary, as is the case with many plans, dies before you. The life insurance funds, like a bank account you owned, will be estate assets if no beneficiary outlives you.
This can cause problems in a variety of situations. If the beneficiaries of your life insurance policy and those of your estate aren’t the same, you can get a distribution you don’t want.
Also, it is not uncommon for people to forget to alter the beneficiary of their life insurance plans after a divorce. Fortunately, a recent change in Florida law means that such designations made by the now-ex-spouse are no longer legal once the divorce judgment is entered.
When a big life event occurs, such as a divorce or the death of a family member, you should evaluate your estate planning and beneficiary designation to ensure that your estate is distributed to the “appropriate people.”
What happens in life insurance probate?
Unlike wills, life insurance does not go through probate as long as you have selected a beneficiary. This means that, in most cases, your beneficiary will receive the death benefit sooner than if the benefit is distributed through your estate. Why would you want to avoid probate if you have a life insurance payout?
Do life insurance policies go to the estate?
Ownership of the policy is often overlooked, but it is a crucial concern, especially in large estates. Regardless of who pays the insurance premiums or who is appointed beneficiary, death benefits from life insurance are usually included in the estate of the policy owner. The transfer of a life insurance policy’s ownership is a complicated process. An expert estate planner or insurance agent should be consulted about ownership provisions.
In Minnesota, for example, even if you transfer ownership of a life insurance policy within three years of death, the death benefits would very certainly be included in the original owner’s estate value. The new owner can also change the beneficiary, borrow against the policy, surrender or cancel it. If relationships are shaky or there is any doubt about the new owner’s skills or intentions, caution should be exercised while changing ownership.
What happens when the owner of a life insurance policy dies?
The policy remains in effect if the owner dies before the insured (because the life insured is still alive). If the policy has a contingent owner designation, the contingent owner becomes the new policy owner. If the policy does not have a contingent owner designation, the policy becomes an asset of the estate of the deceased owner.
What happens when life insurance goes to the estate?
- The proceeds of the life insurance policy will be deposited in the decedent’s probate estate and used to pay the decedent’s final bills.
- The proceeds of the life insurance policy will go to the decedent’s living heirs-at-law, individuals who are so closely related to him that they would be legally entitled to inherit from him if he had died without leaving a will. This can vary depending on state legislation and the payment rules of the insurance carrier, but the bottom line remains the same. Unless the life insurance proceeds are payable to the decedent’s estate rather than his heirs-at-law, the proceeds do not have to be used to pay the decedent’s final bills.
How do I keep life insurance proceeds out of my estate?
The creation of an irrevocable life insurance trust is a second way to keep life insurance proceeds out of your taxable estate (ILIT). You cannot be the trustee of the trust or retain any rights to revoke the trust in order to complete an ownership transfer. The policy will be held in trust in this case, and you will no longer be considered the owner. As a result, the proceeds are excluded from your estate.
Do I need to go through probate?
Is it necessary for everyone to use probate? No. Many estates don’t need to go through this process. Probate is usually not required if there is only jointly owned property and money that passes to a spouse or civil partner when someone dies.
Is the beneficiary of life insurance responsible for debt?
If you’re the specified beneficiary on a life insurance policy, you have complete control over the funds. Unless the loan is also in your name or you cosigned for the obligation, you are not accountable for the debts of others, including your parents, spouse, or children.
How long after death can you claim life insurance?
There is no time limit on life insurance death benefits, so you don’t have to worry about filling a claim too late. To file a claim, you can phone the company or, in many circumstances, start the process online.