Upon an individual’s death, their estate will likely go through probate. Not all property is subject to probate, and families who know their loved one had a life insurance policy wonder which category it falls in. Entering probate adds more stress to an already difficult situation. It means waiting longer to claim the payment, possibly ending up with much less money than expected, and potentially having a conflict with family members about a distribution.
The short answer is: it depends. In this article, our attorneys explain when life insurance goes through probate and what to expect if you are the beneficiary of a policy that is claimed to be a probate asset.
If you need legal advice, we are always available for a free case evaluation. Call (888) 510-2212 to speak with one of our life insurance lawyers.
What Is Probate?
Probate is a legal process during which a court validates the will and last testament of a decedent and confirms the appointment of an executor to settle the assets of the decedent’s estate: from the distribution of assets to the payment of creditors. The process is finalized with the court issuing an official document closing the estate.
If the person dies without a will (a situation legally known as intestate), the court instructs a chosen administrator to handle the decedent’s assets according to state law.
The probate process looks as follows:
- An individual or entity usually named in the will asks the probate court to be appointed as the legal representative of the decedent’s estate. They would become executors or administrators if the decedent did not leave a will.
- The legal representative notifies the creditors, heirs, and beneficiaries that the estate is in probate.
- The executor or administrator inventories and appraises all assets subject to probate and changes their legal ownership from the decedent to the estate.
- The legal representative handles debts and taxes.
- The legal representative distributes the remaining assets to the intended beneficiaries according to the will or the state law if there is no will.
- The legal representative submits records of their actions to the court. They also ask for the estate to be closed and for them to be released from their role.
The probate process may seem pretty straightforward but it is lengthy and can be quite expensive. Luckily, not all property must go through the probate process, which means individuals may plan around it.
Is Life Insurance Subject to Probate?
Usually, a life insurance policy is considered a non-probate asset. It does not need to go through probate. There are a few scenarios, however, when an insurance company will pay the life insurance benefit to the estate.
If a life insurance policy has a designated beneficiary and the beneficiary outlives the policyholder, it will not go through probate since it is not part of the decedent’s estate. Instead, the death benefit is paid out directly to the beneficiary.
When a life insurance policy has a designated beneficiary the insurance company has a legal obligation to pay it to the named beneficiary. Since the payment is not part of the estate, the will cannot dictate who inherits it. The policyowner can control who receives it only when they buy the policy or complete a “change of beneficiary” form provided by the insurer.
By bypassing the estate, life insurance proceeds are not available to creditors. The beneficiaries have no obligation to cover the decedent’s debts.
There are a few exceptions to this rule:
The Estate Is the Policy Beneficiary
If the policyowner listed his or her estate as the policy beneficiary, the life insurance payout becomes part of the estate and has to go through probate along with the other estate assets. This means that creditors will have access to it should the policyowner have debts at the moment of their passing.
As mentioned above, bills and taxes have to be paid first and the rest will be distributed to the intended beneficiaries.
The Primary Beneficiary Has Died
When applying for life insurance, individuals are encouraged to name more than one beneficiary – multiple primary or contingent beneficiaries. If a primary beneficiary dies before the insured, the benefit will go to the contingent beneficiary. If one of the primary beneficiaries dies before the insured, the life insurance policy payout is split among the remaining beneficiaries as per the policyholder’s wishes and does not enter probate.
If no primary beneficiaries are left, the money will go to the contingent beneficiaries and, again, does not need to pass through probate court.
All Policy Beneficiaries Have Died
If both primary and contingent beneficiaries predecease the policyowner, there are two ways life insurance proceeds might be handled:
- The life insurance money will become part of the decedent’s estate, thus, go through probate court.
- The death benefit will be divided among the decedent’s living heirs according to the state’s intestacy laws. These laws instruct how assets not included in a will or trust should be distributed between family members. This means that the closest relatives become the policy beneficiaries, and the proceeds are not subject to probate and cannot be used to pay the decedent’s debts.
Regardless of the scenario, there is a significant disadvantage. If the life insurance beneficiaries and the will beneficiaries are not the same, the money may not be distributed as the decedent would have wanted. At the same time, such cases often lead to beneficiary disputes. If you are already facing such troubles and do not know how to handle them, read our blog post about contesting a life insurance beneficiary designation. For legal advice, call one of our life insurance lawyers at (888) 510-2212 for a free case evaluation.
Read more about what happens to the death benefit when the life insurance policy beneficiary is deceased.
There Is No Beneficiary Named on the Designation
If the policyowner fails to complete a beneficiary designation form, the life insurance proceeds will be dealt with the same way as if all named beneficiaries have died: the money will either enter the estate and become available to creditors or be divided among close relatives based on intestacy laws, safe from creditors.
The Life Insurance Beneficiary Is a Minor Child
Naming a minor child as the beneficiary of a life insurance policy poses certain challenges. Children cannot take legal ownership of the death benefit unless certain preventive measures, such as a custodial account or appointing a guardian, are set in place. Our lawyers discuss this at great length in our article about what happens if the life insurance beneficiary is a minor. Usually, a minor child’s benefit from a life insurance policy is placed into a special account that becomes available when a child turns 18.
The Policyowner Failed to Change Beneficiaries After Divorce
Handling life insurance during divorce can be confusing without legal advice.
Some states have laws that automatically revoke an ex-spouse’s rights to life insurance after divorce. If the former spouse is the sole primary beneficiary of the policy and the insured did not update the designation upon divorce, the policy may be left without a beneficiary if a revocation statute applies. When this happens, the policy may have to go through probate.
Things become more complicated if the insured had employer-provided life insurance. Such policies are governed by ERISA, a federal law that overrides state laws, including the automatic revocation of life insurance rights upon divorce. ERISA allows the beneficiary designation to control regardless of state law documents. This means that if the policyowner fails to change the beneficiary after the divorce, the proceeds may be paid to the ex-spouse when they file an ERISA claim.
What Life Insurance Policies Require Probate?
There is no specific type of policy that requires probate. However, any type of life insurance policy (whole life insurance, term life insurance, accidental death and dismemberment, etc.) may go through probate if there is no beneficiary listed or the decedent’s estate is named as a beneficiary.
Does a Life Insurance Trust Have to Go Through Probate?
A trust sits separately from the rest of the decedent’s financial assets and is not part of the estate. If a trust is a beneficiary of a life insurance contract, it collects proceeds without having to go through probate. Instead of waiting months for the court to settle the estate, trust beneficiaries should receive the payout within weeks of submitting the death certificate.
What Happens If the Proceeds Are Part of the Estate?
When life insurance enters probate, the company writes a check with the payout amount to the estate. The executor must deposit the check into the estate account. Depending on the situation, the probate court will use the money to cover debts, taxes, and expenses before distributing the rest to the beneficiaries named in the will or, according to the intestacy laws, if there is no will.
How Long Is Life Insurance in Probate After a Death?
Probate may take several months depending on the size and complexity of the decedent’s estate. It is a lengthy process partly due to the many administrative responsibilities the executor or administrator needs to carry out and partly because this gives creditors time to come forth with claims to the estate.
Can You Avoid Probate?
A policyowner may choose to plan his or her estate in such a way that as few assets as possible go through probate. For example, they may:
- Designate more than one beneficiary, whether several primary or contingent beneficiaries;
- Update the beneficiary designation after divorce or after any other major life event;
- Change the beneficiary according to the policy’s requirements and not through the will; (Read more about this in our article about life insurance beneficiary designation vs. wills);
- Put the life insurance policy in a trust if the beneficiary is a minor child and assign a guardian.
How Our Life Insurance Lawyers Can Help
If a life insurance benefit is being paid to the estate and not the beneficiary, the beneficiary may feel confused and frustrated. In such situations, it is important to know the law surrounding the life insurance policy payout.
If you are a beneficiary on a life insurance policy and the payout is being delayed, call our life insurance attorneys. We will protect your life insurance beneficiary rights by helping you understand the law and the course of action to take.
Alternatively, if you are the administrator of an estate that is listed as a beneficiary on a life insurance policy but the payout is being challenged by another claimant, you should seek legal advice.
At our law firm, we work on a contingent fee basis. This means that we get paid only if we recover the death benefit you are rightfully entitled to. Only then we will agree on a reasonable fee that you feel comfortable with.
If you need immediate assistance, call (888) 510-2212 to speak with one of our life insurance lawyers. We offer free case evaluations.