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.
How Is Life Insurance Payout Processed?
When someone dies, the beneficiaries listed on their life insurance policy will need to file a claim with the insurance company. Typically you will need a copy of the death certificate to submit to the insurance provider along with your claim. Once your claim is reviewed and approved, the financial payments will be made directly to the beneficiary. This process can take one to three months. In some cases, your life insurance company may reach out and ask for additional information about you as a beneficiary.
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 manage the benefits that were paid out by the life insurance policy until the minor becomes a legal adult at the age of 18.
Are There Any Exceptions?
There are some cases when life insurance payouts will go through probate. The first is if the deceased has not named anyone as a beneficiary on their life insurance policy. The second situation where this might happen is if the beneficiaries are all deceased as well. In both of these cases, the life insurance money becomes part of the deceased’s estate, and it goes through probate so that the court can determine who should rightfully get the payout.
Life Insurance Legal Concerns
Even though your life insurance doesn’t go through probate, you should still factor it in when planning your estate and considering your family’s responsibilities at the end of your life. You should use your life insurance to cover the cost of a funeral, pay off any debts you might have at the end of your life, and support your children and any other dependents you may have. There are calculator tools online that you can use to determine how much life insurance coverage you need.
You should make a habit of checking on your life insurance policy every few years and keeping it updated. There is a good chance your beneficiaries could change as you get older. For example, you may get divorced or remarried. You also cannot list children as beneficiaries when they are under 18 without a trustee, but after they become adults, you may want to change that. The amount of coverage you need can also change as you get older. Every few years, sit down with your insurance policy to review it and make sure it’s still up to date. If you need to make changes to it, contact your insurance provider right away to get it taken care of. It’s also important to note that your insurance policy and your will are completely separate, so you can’t change your insurance beneficiary with your will. Even if you designate your entire estate to one person in your will, your insurance policy could still go to a different person if you have someone else listed as a beneficiary.
If your estate is large enough to be subject to estate taxes, keep in mind that your life insurance policy will be part of that. This is one of the only times that your insurance policy is going to be considered part of your estate. You are only subject to estate taxes if the net worth of your estate is over $5 million. Keep this in mind when planning your insurance policy. You don’t want to accidentally take out a policy that will bump your net worth over $5 million, which subjects your family to costly estate taxes. Estate taxes can vary from state to state, but can be as high as 40 percent in some cases.
Planning your estate can be very challenging. While you can build a will on your own, it may help to talk to an expert, particularly if you have a complex financial situation. Maybe you own a business, have multiple properties, or have a unique family setup that needs further consideration. Talking to an estate planning specialist will help you review your options and determine what makes the most sense. They can also help you navigate the complexity of estate taxes and prevent you from paying more than necessary.
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 establish 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.