Many people have a life insurance policy, which is intended to take care of their loved ones financially after they pass away. Some policyholders want it to be used to replace their salary, provide funds to pay for their children’s future education or just to provide their family with peace of mind.
It’s helpful to understand when the life insurance proceeds are included in the person’s estate and when they are not.
If the life insurance policyholder completed a beneficiary designation form and the beneficiary survives the policyholder, the policy proceeds will be paid to the beneficiary and will not go through probate. Probate is the process to administer the person’s estate after he or she passes away.
Once the proceeds are transferred to the beneficiary, he or she owns them and is not responsible for paying the deceased person’s debts and creditors cannot claim the funds. However, sometimes the deceased person will name his or her estate as the life insurance policy beneficiary. In that situation, the funds would be used to pay the deceased person’s debts.
If the named beneficiary does not survive the policyholder, the proceeds will either go into the deceased person’s probate estate and can be used to pay his or her final debts or the proceeds will go to the deceased person’s heirs. This will depend on the individual’s circumstances.
Life insurance is important and it is only one part of creating an estate plan. An experienced attorney can provide guidance and advice.