Saturday, August 13, 2022

Does Life Insurance Go Through Probate

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Are Life Insurance Proceeds Taxable Income

Do Your Life Insurance Proceeds Go Through Probate?

Normally, you do not have to pay income tax on the insurance proceeds as a beneficiary of a life insurance policy. That is because the IRS does not consider death benefits from an insurance policy to be income. However, if you do not take the insurance proceeds in a lump sum, then there may be tax consequences.

Exceptions: When Life Insurance Payouts End Up In Probate

While life insurance proceeds usually avoid probate, there are some rare exceptions: If no beneficiaries are named or if none of the named beneficiaries are alive, then the life insurance will go into probate so that the court can determine the rightful recipient.

One particular scenario to watch out for is divorce. Many states have laws that automatically revoke ex-spouse beneficiary designations after a divorce. So if the sole beneficiary of your life insurance policy is your spouse, but you later get divorced and forget to change that designation, the payout of your life insurance policy might be headed for probate. But to complicate matters, some federal laws have the ability to turn this standard upside-down. Employer-sponsored life insurance policies that are governed by ERISA will look only at the beneficiary designation if your beneficiary is your ex-spouse, so be it. The takeaway? If you get divorced, update your estate plan, and especially your life insurance and retirement beneficiary designations.

If the insurance money does end up in probate, the insurance company issues a check made payable to the probate court. The probate court then deducts any probate fees and attorney fees from the money and distributes the balance according to the will of the person who died. If there is no will, then the money is distributed according to state laws called “intestacy laws.”

Where To Buy Life Insurance

The times they are a-changin but even in periods of uncertainty, there are still steps you can take to protect your loved ones financial futures. While you cant control everything that happens around you, you can take the lead when shopping for a whole life insurance policy. If you need affordable life insurance, knowing where…

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How To Avoid Probate Through Beneficiary Designations

Weve already established that avoiding probate is a time- and money-saver. So how can you make sure that a life insurance policy doesnt go through probate?

Properly designate beneficiaries.

Weve provided some guidelines:

The most important thing to remember is to keep your beneficiary designations up to date. Check them periodically, and make sure to update them after major life events such as a divorce, marriage, or death of a loved one.

Life Insurance Policy & Probate

So, Does Life Insurance Have to Go Through Probate?

Life insurance usually doesnt have to pass through the process of probate. Usually, without having to go through probate, the benefits of a life insurance contract would be given automatically to the survivor who is listed on the policy. There are cases, though, that would cause life insurance to get through the probate. When that occurs, it will greatly postpone the compensation the loved ones get. The sum of the bonus they were expected to earn could also be significantly decreased.

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How Life Insurance Impacts Estate Taxes

A life insurance policy with up-to-date beneficiary designations does not have to go through probate and thus does not get used to pay things like income taxes. However, estate taxes are a different matter. The cash value of a life insurance policy purchased and owned by the deceased is included in that individuals taxable estate and is subject to estate taxes.

Most people wont have an estate large enough to surpass the federal estate tax exemption, which is $11,580,000 in 2020. But someone could find themselves unexpectedly in that bracket if they dont count their insurance policy. For instance, if an individual believes their estate will be exempt because its valued at $10 million, and they have a $2 million death penalty payable to the estate, they may have to pay estate taxes on the amount over $11,580,000.

Life Insurance Contestability Period

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What If A Life Insurance Policy Must Go Through Probate

Despite our best intentions, we all make mistakes sometimes. So what happens if the owner of a life insurance policy dies, and there is no available beneficiary to receive the death benefit?

The policy must go through probate as part of the deceaseds estate.

First, the insurance company issues a check to the probate court. The probate court will oversee the management of the funds either for payment of taxes and debts, if they remain, or for distribution to heirs.

Some states exempt a portion of the life insurance benefit from debt or tax collection, but the amounts are generally fairly low.

How Our Life Insurance Lawyers Can Help

Life Insurance: Beneficiaries Bypass Will & Probate

If a life insurance benefit is being paid to the estate and not the beneficiary, the beneficiary may feel confused and frustrated. In such situations, it is important to know the law surrounding the life insurance policy payout.

If you are a beneficiary on a life insurance policy and the payout is being delayed, call our life insurance attorneys. We will protect your life insurance beneficiary rights by helping you understand the law and the course of action to take.

Alternatively, if you are the administrator of an estate that is listed as a beneficiary on a life insurance policy but the payout is being challenged by another claimant, you should seek legal advice.

At our law firm, we work on a contingent fee basis. This means that we get paid only if we recover the death benefit you are rightfully entitled to. Only then we will agree on a reasonable fee that you feel comfortable with.

If you need immediate assistance, . We offer free case evaluations.

Attorney Tatiana Kadetskaya has over 10 years of experience in life insurance law representing beneficiaries and policy owners. She is best known for successfully collecting denied and delayed claims and settling complex beneficiary disputes and interpleader lawsuits.

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Probate And Life Insurance

Typically, life insurance policies pass outside of the probate process once you pass away. What this means is that the money owed to your beneficiary gets mailed directly to that beneficiary and does not get included in your estate in the probate court.

Your probated estate will include other assets that you distribute through the terms of your will. A personal representative will be appointed to inventory all of your probate assets, notify any possible creditors and then make distributions accordingly in line with the various rules of estate administration. This may include paying necessary taxes, funeral costs and all valid claims against the estate.

While life insurance should bypass the probate process, things may not always go as planned.

If the beneficiary listed on the life insurance is deceased or is unable to be located, the money will have to be paid into your probate estate and distributed to beneficiaries listed in your will. If you do not have a valid will, the money will be included in your estate and distributed according to the Maryland laws of intestate succession.

No Beneficiary Listed

If you do not list a beneficiary at all on your life insurance policy, the same thing happens. It will be included in your probate estate and distributed according to your will . If any of the beneficiaries either listed on your policy or determined through probate is a minor, then a guardian will have to be appointed.

Is The Beneficiary Of Life Insurance Responsible For Debt Can Life Insurance Proceeds Be Taken By Creditors

No, and this is one of the reasons going through probate is disadvantageous even if the estate value ends up being distributed appropriately.

If the insured was in debt at the time of death, their estate will first be used to pay off any outstanding debts. When the remains of the estate is distributed to the insureds heirs, those proceeds may be subject to estate taxes. In contrast, if a beneficiary receives the insureds death benefit directly from the insurance company, the beneficiary will receive the full amount without debt collection or tax collection.

Many states exempt a specified amount of life insurance death benefits from debt and/or tax collection even after the death benefits are transferred to the insureds estate, but this depends on the laws in your state.

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Do You Need To Explore Your Options In Life Insurance

If youre looking to begin a new life insurance policy or make adjustments to your existing one, please reach out to Insurance Specialists, Inc. Our brokerage has more than 60 years of experience helping clients identify and secure policies with high-quality benefits that can make sure their loved ones are protected after they pass on.

With a valid life insurance policy in place, you can rest assured that something will be passed on to those you love to help them get by in your absence.

Contact us online or call 451-0883 today to ask about which options in a life insurance policy are right for you.


Do Life Insurance Policies Go Through Probate

Does Life Insurance Go Through Probate?
  • Tatiana Kadetskaya

Upon an individuals death, their estate will likely go through probate. Not all property is subject to probate, and families who know their loved one had a life insurance policy wonder which category it falls in. Entering probate adds more stress to an already difficult situation. It means waiting longer to claim the payment, possibly ending up with much less money than expected, and potentially having a conflict with family members about a distribution.

The short answer is: it depends. In this article, our attorneys explain when life insurance goes through probate and what to expect if you are the beneficiary of a policy that is claimed to be a probate asset.

If you need legal advice, we are always available for a free case evaluation.

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What Can Cause Life Insurance To Go Through Probate

As a general rule, life insurance does not go through probate.

As long as you have named a beneficiary who is still alive when you pass away, it will bypass probate.

Unfortunately, there are situations where your life insurance death benefit might wind up in the hands of the courts. The question of whether life insurance goes through probate or not is frequently overlooked.

If the policy hasnt been kept up-to-date and the listed beneficiary has already passed away, the benefit could go to your estate. When life insurance goes into probate, it can take a long time for your loved ones to see the money.

When youve bought insurance to protect your family and provide for their future, you must make sure your policy will be ready for them after your passing. Keeping your policy updated ensures it will stay out of probate.

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Social Security Benefits: Monthly Survivors Benefits

Family members may also be entitled to monthly survivors benefits. You don’t have to be of retirement age to receive benefits: dependent children, surviving spouses, and even some ex-spouses may be eligible for survivors benefits. The more quickly family members apply for these benefits, the better, because some of them are not retroactive.

Applicants can start the application process over the telephone or online at, which may speed things up, but they won’t be able to complete the process without a face-to-face meeting with a staffer at an SSA office. Generally speaking, the following family members may be entitled to monthly survivors benefits.

Surviving spouses. A surviving spouse who is already receiving Social Security benefits based on the deceased person’s earnings just needs to report the death to the SSA at 800-772-1213. The SSA will change monthly benefits to survivors benefits. If the spouse is already getting benefits, the SSA will check to see whether or not the survivors benefit would be higher. The spouse will receive the higher amount.

A surviving spouse who is not already getting benefits or is receiving benefits based on his or her own earnings record will need to apply for survivors benefits. Eligibility for survivors benefits will depend on the survivor’s age and family circumstances. Benefits are given to any surviving spouse who:

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If Your Life Insurance Beneficiary Has Died

What happens if you have someone named as the beneficiary of your life insurance policy, and your beneficiary dies? The answer depends on when the beneficiary dies. If they die before you, the policy benefits will go to any co-primary beneficiaries for instance, if your three children, A, B, and C are your primary beneficiaries, and A predeceases you, the policy will still go to B and C. No probate problems.

If all of your co-primary beneficiaries predecease you, however, the insurance company will pay the policy benefits to a secondary or contingent beneficiary if you have one. If you have no contingent beneficiary, the life insurance benefits will be paid to your estate, and they will have to go through probate.

Are Life Insurance Proceeds Assets In Probate

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Normally life insurance proceeds go directly to the name beneficiaries and are not probate assets.

Unless payable to your own estate, death benefits payable under your life insurance policies are NOT estate assets, which means they do not go according to your Will and which sometimes means they go to the wrong people.

Money paid out on your life insurance policy when you die is not your money. It is the money of the insurance company which, under the policy, has a legal obligation to pay the named beneficiary. So that money is not part of your estate, and you cannot control who gets it through your Last Will. You control who gets it by the designation of beneficiary in your initial application, and you can change that beneficiary only by filling out and filing with the insurance company a change of beneficiary form provided by the company.

The only exception is when the insurance policy is payable to your estate or where, under many policies, the only named beneficiary dies before you. Without a beneficiary who outlives you, the life insurance funds will be estate assets, just like a bank account you owned.

This can lead to trouble in several types of cases. If the beneficiaries of your life insurance policy are not the same as the beneficiaries of your estate, that could result in a distribution you dont want.

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What Are Some Of The Drawbacks Of Probate

Probate may be a necessary process to families when theres a very detailed will or trust that lays out exactly how everything is to be re-titled, but its still necessary to debt collectors who want to make claim for the money theyre owed. Theres a long list of reasons why people go through a long estate planning process to avoid probate, and thats primarily because of all the drawbacks.

Here are some of the known problems with probate:

  • Time it Takes to Settle- It can take anywhere from 9 months to 2 years to settle an estate thats going through probate depending on whether theres multiple beneficiaries or if the estate is taxable. If heirs have immediate expenses they were hoping to pay for with their inheritance, it might not happen because the funds will be tied up.
  • Everything is Public Record- If youre a private person, you cant keep things private as soon as your estate goes to probate. This is because everything going through the probate courts is public record. This is because government agencies and creditors are free to see how much money is in the estate so that they can collect money thats due.

How Life Insurance Beneficiaries Work

If you hold an active life insurance policy and you pass away, the Beneficiary you named on the policy will receive the policys death benefit. A Beneficiary can be one person or entity, or it can be a number of people. In addition to naming a primary Beneficiary , you should also name at least one contingent Beneficiary. Contingent Beneficiaries would be second in line to receive the death benefit, and they would only get money if the primary Beneficiary was unable or unwilling to accept the proceeds.

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When Life Insurance Is Part Of An Estate

A life insurance policy has one or more designated beneficiaries if the decedent completed a beneficiary designation form for the policy before their death. If at least one of the designated beneficiaries survives the decedent, the life insurance proceeds pass directly to the beneficiary outside of probate.

This is a critical distinction because the probate process deals with the decedent’s creditors and pays their debts with available estate funds. When the insurance proceeds go directly to a beneficiary, bypassing the estate, the money belongs to the beneficiary. Friends, relatives, and insurance beneficiaries are not responsible for paying any debts the decedent left behind, so the money is out of the reach of their creditors. The life insurance proceeds don’t have to be used to pay the decedent’s final bills.

But there’s a catch. People sometimes name their estates as beneficiaries of their insurance policies, possibly intending that the policy should do just thatpay off their final bills. This sends the money directly into the estate’s coffers. In this case, it could and would be used to pay their bills.

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