When Life Insurance Is Part of an Estate

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Is life insurance part of an estate and available to pay a deceased person's bills? It depends on whether the life insurance policy had a living, designated beneficiary at the time of the policy owner's death. 

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 that—pay 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. 

If There Isn't a Surviving Designated Beneficiary

If the decedent completed a beneficiary designation form prior but all of their beneficiaries predecease him, one of two things can happen.

  1. The life insurance proceeds will pass into the decedent's probate estate and become available to pay the decedent's final bills. 
  2. The life insurance proceeds will pass directly to the decedent's living heirs-at-law, individuals so closely related to him that they would be legally entitled to inherit from him if he had not left a will. This can depend on state law and the insurance company's payment policies, but the bottom line is the same. The life insurance proceeds don't have to be used to pay the decedent's final bills unless they're payable to their estate rather than his heirs-at-law.

If Decedent Failed to Complete a Beneficiary Designation Form

The same rules apply if the decedent failed to complete a beneficiary designation form before their death. Either the insurance proceeds will pass into the decedent's probate estate and be available for paying the decedent's final bills, or the proceeds will pass directly to their heirs-at-law, safe from creditors.

Different Rules Apply to Estate Taxes

These rules address debts in the deceased's sole name at the time of their death, as well as personal tax debts, but they do not apply to estate taxes that may be due if the value of their estate is significant. A hefty life insurance policy payable to their estate might increase its value above the federal exemption amount so that an estate tax would be due. In this case, the proceeds are subject to taxation if the decedent personally owned the policy at the time of their death, or if he transferred ownership of the policy to someone else within three years of their death.

Article Sources

  1. Gudorf Law Group, LLC. "Does Life Insurance Have to Go Through Probate?" Accessed Dec. 3, 2019.

  2. Boonswang Law. "Why Would a Life Insurance Policy Need Probate Papers?" Accessed Dec. 3, 2019.

  3. Canandaigua National Bank & Trust. "Six Life Insurance Beneficiary Mistakes to Avoid," Accessed Dec. 3, 2019.

  4. Wespath. "Designate a Beneficiary," Accessed Dec. 3, 2019.

  5. IRS. "Estate Tax," Accessed Dec. 3, 2019.

  6. Cornell Law School. "U.S. Code § 2035. Adjustments for Certain Gifts Made Within 3 Years of Decedent’s Death," Accessed Dec. 3, 2019.