If a loved one has passed away and you were named a beneficiary of his or her life insurance policy, you might be wondering if the insurance will have to go through probate before you receive a payout. Similarly, if you are taking out a life insurance policy, you are probably wondering if your policy will have to go through probate after you pass away.
The goal of life insurance is to provide financial protection for those who are listed as beneficiaries. If it’s your policy, you want your loved ones to receive benefits as quickly as possible. Likewise, if you are a named beneficiary, you want to receive a payout as quickly as possible. It’s not about being greedy; it’s about being financially protected. Since the probate process can be cumbersome and time-consuming, if life insurance has to go through this process, it could potentially hinder beneficiaries.
So, does life insurance have to go through probate? Below, you’ll find the answer to this question and more.
What is Probate?
Probate refers to the process in which a deceased individual’s estate is essentially “wrapped up”. The purpose of probate is to ensure that the property of the person who has perished is going to the proper beneficiaries. Additionally, probate ensures that any creditors are paid their outstanding debts.
Probate can be a very long process. It can also be quite costly. As such, it can negatively impact beneficiaries that are listed on a life insurance policy, as it can prevent them from receiving a death benefit in a timely fashion, and it can also end up deducting the amount that they will receive.
Life Insurance and Probate
Generally, life insurance does not have to go through the probate process. Typically, the benefits of a life insurance policy will be given directly to the beneficiary that is named on the policy without having to go through probate. However, there are situations that would require a life insurance policy to go through probate. If that happens, the payments loved ones receive can be significantly delayed. It can also drastically reduce the amount of the payout that they were supposed to receive.
When Would Life Insurance have to go Through Probate?
In the following situations, there is a chance that life insurance benefits would have to go through the probate process:
- The primary beneficiary of the policy is deceased. If the beneficiary of the policy passes away before you do, as long as you have co-beneficiaries, life insurance will not go through probate. However, if you do not have a co-beneficiary, your life insurance benefits will be paid out to your estate, in which case the benefits will go through probate.
- The primary beneficiary is a minor. If the primary beneficiary of a life insurance policy is under the age of 18 at the time of the insured’s death, the benefits may need to go through probate. Why? – Because legally, a minor cannot take ownership of the benefits that are paid out by a life insurance policy. As such, the benefits will need to go through probate. A guardian will be appointed for the child, and that guardian will hold onto a manage the benefits that were paid out by the life insurance policy until the minor becomes a legal adult at the age of 18.
How to Avoid Probate?
If you are worried about your life insurance policy going through probate, or you are named the beneficiary of a loved one’s life insurance policy, there are some things that you can do to prevent the benefits from going through probate.
One of the easiest ways to avoid the probate process is to establishing a trust for the owner and the beneficiary of the policy. With an irrevocable trust, your life insurance benefits cannot go through probate; instead, the beneficiary will be able to access them immediately after you pass away.
If your loved one is the owner of the life insurance policy, speak to him or her about setting up an irrevocable trust so that the probate process can be avoided.
Your insurance agency and a reputable lawyer that specializes in estate planning can assist you with avoiding the probate process for insurance. They can guide you through setting up the most effective policy – and a trust – that will ensure your beneficiaries, or that you, the beneficiary, will receive the benefits of the life insurance policy in a timely fashion in the event of death.
Life insurance is meant to financially protect surviving loved ones. Therefore, it’s important to ensure that this type of policy does not end up going through the probate process. Take the time to now to avoid probate for your life insurance so that loved ones will not have to deal with even more heartache when you pass away.