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.
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.
If a 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.
