When an estate goes through probate, assets are passed down to beneficiaries. If someone does not have an estate plan, then state law will dictate who should receive those assets, generally focusing on next of kin. If the person does have an estate plan, they can choose any beneficiaries they would like, and the estate administrator will follow those instructions.
For many people, though, a life insurance policy is one of the largest assets they own. They may have purchased this years or decades before their passing, and they have been making consistent payments to stay current on the policy.
When they pass away, the life insurance company pays out the total amount to the family. Does this mean that the insurance policy also needs to go through the estate administration process?
It often skips probate
Typically, a life insurance policy will skip probate. The reason is that the insurance provider should have been given a beneficiary designation when the policy was purchased. The company pays that beneficiary directly, regardless of state law or anything written in an estate plan. The beneficiary designation determines who receives the payout.
There are some cases in which the payout may be handled differently. For instance, no beneficiary may have been named, so the policy pays out into the deceased person’s estate. In another situation, the person may have set up a trust and named that trust as the beneficiary. That would mean the life insurance payout funds the trust, and the trustee then distributes the assets based on the instructions provided in the trust documents.
Because life insurance can be so valuable, it is very important for families to understand exactly how it should be addressed during estate administration and what legal steps they may need to take.