No one likes to talk about dying. It’s a part of life. We have life insurance to help our loved ones pay off our debts, pay for burial expenses, or to leave something for them to make the transition less of a burden.
We need to designate beneficiaries when setting up a life insurance policy, both primary and contingent beneficiaries. When a person dies, the named beneficiary will file a life insurance claim with the insurance company that includes a copy of the death certificate. This claim is to begin the process of the life insurance beneficiary obtaining the death benefit check.
Once everything has been received, reviewed and approved, the named beneficiary will receive the payment from the life insurance policy. This process can take between one and three months.
There are times when the beneficiary has passed away prior to the insured. Life insurance policies without a beneficiary will go through a probate process. To avoid this, you can name your trust as the beneficiary, making your death benefit part of your estate. However, this could make for another lengthy process for the trust beneficiary to get the proceeds of your life insurance policy.
What is probate? The probate process refers to the legal process in which a deceased person’s property and assets are reviewed for determination of legal distribution. It also makes sure that the proper beneficiaries receive what they are supposed to get from the deceased person or persons.
Probate can be a long process and cost a lot of money. It can also cause the beneficiaries of the life insurance policy to not only wait to receive the death benefit but they may also receive less money than was designated because of the cost of probate.
Most life insurance policies with a designated beneficiary are not contested and therefore do not go to probate.
Does life insurance have to go through the probate process?
There are times when life insurance can avoid probate court. However, if not handled correctly before the death of the insured, it can absolutely get caught up in a legal battle.
So the answer to this is both yes and no.
Usually the benefits of the life insurance policy will be given directly to the named beneficiary that is listed on the life insurance policy without having to go through probate.
However, there is a chance for probate if any of the following instances occur:
- The named beneficiary of the life policy has passed away before the policy owner. If a contingent beneficiary is named then probate is not needed and the contingent beneficiary receives the policy’s death benefit.
- The deceased policy owner did not name a beneficiary on the policy.
- The primary beneficiary is a minor. If the named beneficiary is under the age of 18 at the time of the policyholder’s death, the benefits from the policy will go through probate. A legal guardian will be appointed to handle and manage the money until the named beneficiary reaches the age of 18.
If you do name your trust as the beneficiary of your life insurance death benefit and your estate is large enough to be subject to estate taxes, your life insurance policy will be a part of that. This is one of the only times that your insurance policy is going to be considered part of your estate.
The estate is only subject to federal estate taxes if the net worth is over $5 million. This net worth threshold changes periodically. This needs to be kept in mind when taking out a life insurance policy. You may not want your policy to bump your net worth over $5 million and your family have to pay costly estate taxes.
In 2010 when then New York Yankees owner, George Steinbrenner, passed away his taxable estate paid no federal estate tax because the federal estate tax had been repealed that year. It returned in 2011. These things happen, changes estate tax laws periodically.
Probate assets are owned by someone and not automatically transferred to anyone else when the asset owner dies.
Life insurance is a special type of asset because life insurance proceeds generally transfer automatically to the named beneficiary when the policyholder dies. The named beneficiary of the policy does not have to open a probate proceeding or notify the court of the death of the policyholder to claim the life insurance proceeds.
An easy way to avoid the probate process is to establish an Irrevocable Life Insurance Trust (ILIT) for the owner and named beneficiary of the life insurance policy. With an Irrevocable Trust, life insurance benefits cannot go through the probate process and the named beneficiary of your life insurance policy will have uncontested access to the life insurance benefits after the policy owner passes away.
Life insurance policies will sometimes allow the policyholder to make a “per stirpes” beneficiary designation.
The term “per stirpes” means that if the named beneficiary dies before the policyholder, the life insurance benefits will pass to the named beneficiary’s heirs; usually their surviving spouse or children. This can provide extra protection for keeping life insurance proceeds up to date and out of probate court.
When you are ready to get your life insurance policy and name your designated beneficiaries, you will need to get with your insurance agent as well as a reputable lawyer for legal advice that specializes in estate planning. They will help you get things set up and avoid the probate process for your life insurance.
When listing your life insurance beneficiaries and your contingent beneficiaries, make sure you give them as much information as possible about each person. You will need to provide them with their full legal name, address, date of birth, social security number is a plus, and relation to you.
Make sure to keep your beneficiaries updated on your policy. If you change your named beneficiary or contingent beneficiary for some reason, make sure to provide the same information you did on the other people you had listed. The beneficiary will have to provide proof of their identity, so make sure all of the information provided to the life insurance company is accurate
Maintaining your policy’s beneficiary information can help you avoid most any issue in obtaining the policy proceeds. This is done through a beneficiary designation form.
Life insurance can be helpful and beneficial to all in the inevitable event of the death of the insured person. Make sure that you name beneficiaries on your life policy and keep them current. Loved ones shouldn’t have to wait to receive the life insurance death benefit you paid for to help them with debt and burial expenses.