Life Insurance and the Probate Process
Life insurance proceeds can avoid probate if you have selected the right beneficiary. If your life insurance policy is payable to a person and is not paid to your estate, the life insurance death benefit will not be subject to probate. This means that as soon as the named beneficiary files a claim with the insurance company, and the claim is approved, the insurance company will make a direct payment to the named beneficiary.
When you are organizing the information about your property, you should locate your life insurance policies. Contact the insurance companies and ask them to send you a copy of your beneficiary election. You may be surprised to recall who you named as a beneficiary or beneficiaries when you purchased the policy.
If you have more than one beneficiary, the insurance company will pay the death benefit to the beneficiaries in the proportion you designated when you applied for and purchased the insurance or according to any changes of beneficiary you have made since then.
Payable to the Estate
If you name your estate as the beneficiary of your life insurance, the death benefit will be paid to the executor of your estate when you die and will become subject to probate. You might name your estate as the beneficiary of your life insurance if you aren't sure who you want to name. However, you usually buy life insurance because you want to make sure the person you name as the beneficiary has enough money when you are gone. It would be unusual not to have a specific beneficiary in mind when buying insurance.
If you have group life insurance through your employment, you should ask the administrator to provide you with a copy of any beneficiary elections you made. If you have named your estate, you should consider changing the election to a person or persons. Some employers may establish life insurance as a benefit to its retirees. Check with the administrator to learn whether this is a benefit offered by your employer, how much it is worth, and who is named as beneficiary.
Then again, some people may have named their estate as the beneficiary because they didn't realize it would make any difference. You might think that naming your estate as beneficiary is the same as naming a person, because you know that your estate will belong to your family. Your life insurance proceeds may end up going to your family but, when you name the estate, you are unnecessarily subjecting the insurance death benefits to the cost and delay associated with probate.
Circumstances to Consider
There are other circumstances in which you might have named your estate as beneficiary. It is not uncommon when you are employed that your employer provides employee benefits. One of the benefits that might be offered to you is what is called group life insurance. Group life insurance is typically term insurance. It is in force only as long as you are employed and the premiums are paid by you or your employer. There is rarely a cash value associated with it. Group life insurance does not mean that a death benefit is paid to a group of people; it means that because you are a member of the employer's group, you are entitled to a stated amount of insurance benefits paid to the beneficiary or beneficiaries you name.
What happens to my life insurance policy if I divorce and my ex-spouse is still listed as my beneficiary?
If you die before changing your beneficiary designation, the court will more than likely treat the ex-spouse beneficiary as deceased, and the insurance proceeds would go to your estate. You should promptly change your beneficiary designation form if you are divorced.
When you were filling out all of the paperwork before you started your job, you may not have given much thought to who you wanted to name as the beneficiary of the group life insurance benefit. You may have checked the box on the paperwork that said “pay the death benefit to my estate.” In the back of your mind you might have thought that it didn't matter if the beneficiary was a person or your estate; the death benefit would ultimately go to your heirs. However, as you've learned, it does make a difference.