Does life insurance go through probate?

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Lauren Blair has been practicing law for more than 25 years. Lauren has been a licensed member in good standing of the Illinois bar since 1994, the year she graduated from Illinois Institute of Technology’s Chicago-Kent College of Law. Prior to law school, Lauren obtained a Bachelor of Arts in government from Cornell University. For the first 20 years of her practice, she worked in mid-size l...

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UPDATED: Feb 10, 2021

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Overview

  • If a life insurance policy has a named beneficiary (other than the insured’s estate) who is living at the time of the payout, then the life insurance proceeds will be paid directly to the beneficiary and will not go through probate.
  • If the beneficiary dies before the insured, then the life insurance proceeds will become part of the insured’s probate estate, and neither the beneficiary nor the beneficiary’s estate will receive any proceeds.
  • Also, if a beneficiary is not named or the insured’s estate is the named beneficiary, then the proceeds from the life insurance policy become part of the insured’s probate estate.

Many people assume that when they die, their life insurance proceeds automatically go to their family. That result, however, depends on whether any beneficiaries are named in the policy and if so, whether the named beneficiaries are alive at the time the insured dies. If the person you want to receive the death benefit is not named in the policy as a beneficiary or if the named beneficiary predeceases the insured, then your life insurance proceeds will pass through probate.

If your death benefit becomes part of the probate estate, it could trigger an estate tax or be used to pay off creditors reducing the amount of assets available for your heirs. To avoid unintended consequences, click here to learn more about life insurance and what causes it to go through probate.

What are life insurance beneficiary rules?

Life insurance beneficiary rules govern who receives the life insurance proceeds, also called the death benefit. Whether a beneficiary or the insured’s estate will receive the death benefit depends on who dies first, the beneficiary or the insured.

Life Insurance Paid Directly to Beneficiary

If the designated beneficiary survives the insured, the life insurance policy requires that the insurance company pay the death benefits directly to the beneficiary. Death benefits paid to beneficiaries are outside of the decedent’s estate and, therefore, bypass the probate process.

An estate consists of all of the property and assets a person owns or controls, as well as the debts and obligations owed to others. There are different types of estates but typically, if a person has assets at the time of death, his or her estate must go through probate.

Probate is the legal process through which the court oversees the estate of a deceased person to make sure the debts are paid and the remaining assets of the estate are properly distributed to will beneficiaries and heirs. An estate will be probated whether or not the decedent had a will. If the deceased did not have a will, then it is considered an intestate estate. 

As part of the probate process, a personal representative (an executor if there’s a will, or an administrator if there is no will) will collect and inventory the decedent’s assets to determine the estate’s value. The representative then must make sure there are enough estate assets to cover debts and distribute payments to beneficiaries.

Although probate is the legal process that oversees the payment of the decedent’s debts with estate funds, insurance beneficiaries are not responsible for paying the decedent’s estate debts. Therefore, because life insurance proceeds go directly to named beneficiaries, that money is outside of the insured’s estate and out of the reach of the decedent’s creditors.

Life Insurance Paid to Probate Estate

If, on the other hand, the beneficiary predeceases the insured, then the insurance proceeds will pass into the insured’s probate estate. In that case, the insurance company issues a check payable to the probate court.

The probate court will deduct any probate administrative and attorney fees from the insurance money and distribute the balance according to the will of the deceased. If there is no will, then the money is distributed according to state law.

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What is a life insurance beneficiary vs a will beneficiary?

A life insurance beneficiary is the person, or persons, named in an insurance policy to receive all or a portion of the life insurance proceeds when the insured dies. When you obtain a life insurance policy, you will identify the name of the person whose life is being insured as well as the name of the beneficiary or beneficiaries. If there is more than one person named on the beneficiary designation form, then the policy will also indicate the percentage of death benefits that each beneficiary is to receive.

A will, also known as a Last Will & Testament, is a written document that sets forth the wishes of the person making the will, called the testator, as to how and to whom the testator’s estate is to be distributed after death. A will beneficiary is a person named in the will to inherit money or property from the testator. If a person dies intestate, i.e. without a will or estate plan, the order in which the decedent’s heirs inherit is called “intestate succession” and is governed by state law.

A will cannot be used to designate or change who gets life insurance proceeds. Life insurance is a legal contract between the policyholder and the life insurance company whereby the policyholder agrees to pay a certain amount in monthly premiums in exchange for the insurance company’s promise to pay a certain amount of money to the designated beneficiary.

A life insurance contract is separate from, and not controlled by, a will. So, even if a will says “I want everything to go to my spouse,” if the named beneficiary of the testator’s life insurance policy is a sibling who is alive at the time of the payout, the sibling, and not the spouse, will receive the life insurance proceeds check.

Is life insurance part of an estate after death?

The only way life insurance becomes part of an estate after death is if the policyholder/deceased insured named his estate as a beneficiary of his insurance policy. Naming one’s estate as the beneficiary will send the death benefit directly to the decedent’s estate. People who use this type of estate planning generally do so intending that the life insurance proceeds will be used to pay off their final bills.

What happens when life insurance goes to the estate?

Sometimes adding life insurance proceeds to a probate estate can have unintended consequences. Life insurance proceeds can substantially increase the value of your estate assets, and consequently your probate taxes and fees. Policies with large death benefits that are payable to an estate could increase the estate’s value above the federal exemption amount, thereby triggering an estate tax that will reduce (or may even wipe out) the amount of assets available to transfer to will beneficiaries or intestate heirs. 

Another consequence of having life insurance proceeds become part of an estate is that those funds will be available and used to pay the decedent’s creditors. Creditor claims, taxes and other debts are paid from the deceased’s estate. These payments will reduce (and in some cases wipeout) the life insurance proceeds, thus leaving heirs and other intended beneficiaries with less money.

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Get Help

If you have named beneficiaries to your life insurance policy, then your life insurance proceeds won’t get caught up in probate. If your beneficiaries don’t die before you, you can rest assured that the death benefit will be paid by the insurance company directly to your named beneficiary upon your death. For advice on setting up life insurance to fit your needs and desires, and to avoid making mistakes in your estate planning, put your ZIP code into our finder tool to speak with a licensed insurance agent who will be happy to help you with any insurance questions you may have.

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