Does life insurance go through probate?

When a loved one passes, it’s usually a time of mourning and grief. It can also leave you exhausted if you’re responsible for their estate. A life insurance policy is the last thing you want to worry about when dealing with a death.

Ideally, the life insurance policy will send a payment to the beneficiary without complications. However, that’s not always what happens. When the life insurance policy isn’t up to date, handling the death benefit can become a nightmare.

Whether it’s term or permanent life insurance, the payment can go into probate when the company doesn’t know to who to make a payment to. When this happens, money from the death benefit is stripped away to handle legal fees and other expenses.

You buy life insurance to protect your loved ones financially, but going into probate takes away the money your beneficiaries should have. While there are situations where life insurance does go through probate, you can learn how to keep every dime of your death benefit in the right hands below.

What is the probate process?

Understanding the probate process is the first step in ensuring your life insurance doesn’t go into probate. Probate starts after you die and is the legal way estates are assessed and transferred. The probate court handles your will and estate assets to ensure everything goes where you want it to. Whenever there’s a contested will, the issue is settled in a probate court.

The first step in the probate process is the selection of a legal representative who handles the will. Most wills dictate who the representative should be, but the probate court will assign one if the will doesn’t specify a legal representative.

Of the many tasks, the legal representative has, one of the most important is debt repayment. According to Debt, about 73% of Americans die with unresolved debt, including mortgages, car loans, credit card debt, student loans, and other personal loans.

Resolving debt can be complicated, especially when dealing with an unexpected death. Resolving leftover debts can be time-consuming, but once the legal representative is done, everything left over in the will goes to specified heirs. Legal representatives can be expensive, especially when the court assigns them. The longer it takes to resolve an estate, the more it costs to retain a representative.

So, what does this have to do with life insurance? After all, a death benefit is paid directly to a beneficiary and has nothing to do with a will. Unfortunately, your death benefit might end up in probate court if things don’t go as planned.

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What happens when life insurance goes to the estate?

Life insurance is not usually a probate asset because it doesn’t go to an estate. Upon death, a beneficiary typically needs to alert the company of the insured’s passing, and then wait for the claims process to settle. Probate courts typically do not get involved because there’s no need to — the death benefit is accounted for.

While it might not sound so bad, keeping your life insurance out of probate court is integral to providing your beneficiary with the full payment you bought them. A key reason for this is that creditors can’t go after a death benefit as long as it stays out of probate.

Unfortunately, there are times when a death benefit has to go to probate court. The most common reason is that the death benefit can’t be paid. When this happens, your death benefit passes to the probate court, which decides what to do with it.

As soon as your death benefit enters a probate court, creditors can seize it to pay off your debts. The legal representative of your estate can also use it to pay debts. If there’s anything left at the end, it will be assigned to the designated heirs in your will.

What happens to your life insurance after probate if you don’t have a will?

If your death benefit finds its way to probate court and you don’t have a will, the court will follow your state’s intestacy laws. Typically, intestacy laws dictate that your estate should pass to your closest relatives, meaning a spouse, children, parents, or siblings.

Assets that you name a beneficiary for, such as a retirement fund, aren’t affected by intestacy laws. Your life insurance is also usually excluded from intestacy laws, so long as your beneficiary is available.

How to Avoid Probate

Keeping your life insurance out of probate is simple. All you need to do is ensure your beneficiary is alive and available to accept payment when you die. Here are a few reasons why your original beneficiary might not work:

• You choose a minor who legally cannot accept a payment
• Your beneficiary can’t be located
• Your beneficiary passes away before you

It might not seem like something that will happen to your insurance policy, but thousands of death benefits go unclaimed. However, you can make sure your death benefit finds its way into the right hands if you follow these guidelines on how to choose your life insurance beneficiary:

• Select an adult beneficiary.
• If you’re considering selecting a minor as a beneficiary, establish a life insurance trust to secure the death benefit in case of your passing before they reach the age of maturity.
• If you have heirs, make sure they know your life insurance beneficiary can’t be changed.
• Choose a new beneficiary if your original dies before you.
• Consider selecting co-beneficiaries.
• Ask an insurance representative if your policy includes a per stirpes designation, which allows your death benefit to pass to your beneficiary’s children.
• Name an alternative beneficiary.
• Update your policy after life events, such as divorce. If your ex-spouse is still listed on your policy, they’ll receive your death benefit even if you’ve remarried.

While an ex-spouse might be alive when you die, many states have laws that automatically void their inclusion as your beneficiary when you divorce. If this is the case in your state, your death benefit might go to probate even if your ex-spouse is still alive.

You can avoid this by updating your insurance company. Either change your beneficiary — especially after you remarry — or indicate that you want your ex-spouse to receive your death benefit, despite the divorce. You should also keep in mind that you can’t change the designation of your life insurance in your will. As long as the beneficiary is valid, it will go to whomever you select in your life insurance contract, no matter what your will says.

Read more: Can you change your life insurance beneficiary?

It’s uncommon for life insurance to enter probate court. As long as you keep your policy updated and make sure you have a living beneficiary for it to pass to, your death benefit will stay out of the court.

Find the Best Life Insurance Policy

Even if the worst happens and your policy ends up in probate court, life insurance is still one of the best ways to provide financial help after your death. Managing your policy and keeping it up to date is the simplest way to keep your policy in the hands of your intended beneficiary.

So, does life insurance go through probate? Not usually. If you’re looking for a new life insurance policy, you can ask about co-beneficiaries or a per stirpes designation if you’re worried about probate. Make sure to compare quotes with several companies to find the best options and rates.

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Case Studies: Life Insurance and Probate

Case Study 1: Unclaimed Death Benefit

John, a 45-year-old individual, passed away unexpectedly, leaving behind a life insurance policy with a death benefit of $500,000. Unfortunately, his designated beneficiary was unreachable and could not be located. As a result, the life insurance company could not pay out the death benefit directly.

The life insurance policy entered probate, and the probate court took control of the death benefit. In this scenario, creditors were able to seize a portion of the death benefit to settle outstanding debts of the deceased.

After deducting legal fees and debts, the remaining amount was distributed among the deceased’s legal heirs according to the state’s intestacy laws.

Case Study 2: Outdated Beneficiary Designation

Sarah, a 55-year-old woman, had a life insurance policy with her ex-spouse named as the primary beneficiary. However, Sarah remarried and failed to update her beneficiary designation after her divorce. Unfortunately, Sarah passed away, and her ex-spouse was still listed as the beneficiary on the policy.

Since many states automatically void the inclusion of an ex-spouse as a beneficiary after a divorce, the life insurance policy entered probate. The probate court reviewed the situation and decided to distribute the death benefit to the designated heirs according to the state’s intestacy laws.

Sarah’s current spouse and children were not able to receive the death benefit directly, and legal fees were incurred during the probate process.

Case Study 3: Living Beneficiary and Avoiding Probate

Mary, a 35-year-old individual, had a term life insurance policy with her sister designated as the beneficiary. Mary passed away, and her sister promptly notified the life insurance company about the death. Since the beneficiary was alive and available, the death benefit did not enter probate.

The life insurance company verified the claim and paid the full death benefit directly to Mary’s sister. As a result, the death benefit remained protected from creditors and bypassed the probate process entirely. Mary’s sister received the funds and used them to honor Mary’s wishes and provide financial security for her family.

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