When you apply for life insurance, the application asks you who will receive the life insurance benefits when you die. You can name one or more persons as the beneficiary or a secondary beneficiary in the event of the death of your first beneficiary. When you name more than one person to receive the policy benefit, you also decide what percentage of the proceeds each person will receive.

Your will has absolutely no effect on who will receive the proceeds from your life insurance policies. As a matter of fact, your will could specifically say, “I leave all of my life insurance to my children, in equal shares,” but this clause would be disregarded completely, and the policy proceeds would be paid to the person or persons you named when you bought the life insurance.

Payable to the Estate

However, there are two ways that your will can affect how your life insurance proceeds will be paid. The first is if you named your estate as the beneficiary when you bought the life insurance policy. Then the life insurance proceeds will be paid to your estate and distributed according to the terms of your will. You might have named your estate as beneficiary of your life insurance policy if you couldn't decide on a person.

Sometimes when a young person is starting a new job and his employer pays for a life insurance policy as part of the employee benefit package, the new employee does not know who she wants to name as beneficiary. In that case, it is typical just to check the box “payable to my estate.” Young people who have no one they wish to provide for could name their alma mater or other charity as beneficiary to avoid directing property to their estate.

When the Beneficiary Is No Longer Living

The second way your will could affect how your life insurance proceeds are paid is if the person or persons you name to receive the life insurance proceeds are not alive. Then, the insurance company will pay the policy proceeds to your estate. Your will may not reference the insurance because it was supposed to be paid directly to the person or persons named in the policy. But most wills have a clause that says, “Distribute any remaining property I own to X,” and the insurance proceeds would be distributed accordingly. This same circumstance could arise if you are divorced and your ex-spouse is named as beneficiary. Some policies assume the divorced party is deceased and cannot be a beneficiary.

Life insurance proceeds avoid the probate process. But before you close the book on what you need to know about life insurance, you should read Chapter 15 to make sure your family does not pay unnecessary estate taxes.