Life Insurance and Probate: Straightforward Guide and FAQs

Published March 11, 2024

In pursuit of financial freedom, people purchase life insurance. Although every policy has a price tag, it is generally considered a safe investment. It gives a sense of security. It makes you feel accomplished that you’ve done what you can to protect those you’ll leave behind one day.

But what arises when that fateful day arrives? Does life insurance go through probate?

In this article, we’ll discuss everything you need to know about life insurance and probate. We’ll cover it all, leaving no questions unanswered. Let’s start.

The Probate Process

It helps to understand the probate process before deciding how it impacts life insurance.

Probate is when a court approves a will and appoints an executor. The executor will carry out the payment of debts and allocation of assets from an estate. Suppose there’s no will. The court appoints an administrator. They will then lead them in the reimbursement of debts and distribution of assets as ruled by state law.

A simple probate process looks like this:

• An individual or entity (typically named in the will) petitions the probate court to become the state’s legal representative.
• The legal representative sends notifications of the death to the heirs and creditors.
• The legal representative reimburses funeral expenses, taxes, and debts
• The legal representative transfers the remaining assets to the heirs
• The legal representative notifies the courts of its actions long requests that the estate be closed

Probate involves considerable administrative legwork and is costly, too. Some describe being an executor as having a second job for months.

Does Life Insurance Go Through Probate?

Does life insurance go through probate? Generally, the reason is that the money in life insurance is not part of one’s estate. It usually never becomes an asset to the person who purchased the policy.

When you get life insurance, there’s a thinking that the amount of the policy is your money that will go to whoever survives you. Yet, that is not the case. Instead, the insurance company holds that policy amount in trust for the policy’s beneficiaries. They will not release that money until the person who bought the policy dies. When that event happens, then the policy agreement is triggered. The company will then reimburse the beneficiaries of the policy.

The monetary value of the life insurance policy never touches the deceased’s estate. Instead, it flows from the insurance company’s coffers to the beneficiaries.

How To Avoid Probate Through Beneficiary Designations

1. A beneficiary must be alive.

A relatively common mistake people make is failing to update a beneficiary designation on a life insurance policy after the death of a spouse. For example, a husband and wife list each other as beneficiaries on their policies. The husband passes away, and the wife receives the proceeds. Yet, she never follows through with her life insurance policy. When she dies, her now-deceased husband is listed as a beneficiary, and there’s no alternative listed. When this happens, the life insurance proceeds through probate.

2. A beneficiary must be over the age of 18

The court must name a guardian to manage the benefits if the appointed beneficiary is a minor. It is until the beneficiary reaches the age of majority.

3. A beneficiary designation cannot be altered through a will.

Beneficiary designations are wholly separated from wills.

4. Designating an alternate beneficiary gives protection.

Listing a second choice decreases the possibility of a policy going through probate. The intended beneficiary is not accessible because of death, minor status, or failure to be reached.

5. Updating policies after divorce guards against unintended consequences

If a divorced individual fails to alter their beneficiary designation before their death, the process could end up going to their ex-spouse. In some cases, divorce ignites an automatic revocation of the ex-spouse as designated beneficiary on a life insurance policy. If that revocation occurs and the policy owner does not issue an updated designation, the policy is treated as having no beneficiary. In that case, the policy proceeds will then undergo a probate.

What Are the Mechanics in Collecting on a Life Insurance Policy As the Beneficiary

To collect the insurance proceeds, you must present the two life insurance documents: the original death certificate and the original policy. Upon receipt, the insurance company will transfer the money directly to you.

Is Life Insurance Part of an Estate?

Life insurance is typically not acknowledged as part of an estate for probate purposes. The proceeds usually go directly to the named beneficiaries.

Are Life Insurance Proceeds Taxable Income?

You do not have to pay income tax on the insurance proceeds. The IRS does not acknowledge death benefits from an insurance policy as income. Yet, tax consequences may arise if you do not take the insurance proceeds in a lump sum.