Does a life insurance policy go through probate?

When someone dies, all of their property and assets will be valued so that they can go through a re-titling process that’s referred to as probate. During the legal probate process, an executor will be appointed who’s in charge of the estate, accounting for assets and dividing property once the settlement process is over.

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While it’s possible for an estate to be settled quickly through the court, in many cases there are legal obstacles that heirs may face while going through these legal proceedings. From dealing with creditors and deciphering the will, to dealing with unexpected litigation that delays the process, probate is a legal process most heirs want to avoid if they’ve been through it once or twice in the past. Since probate can be a lengthy, complex and even expensive process, you should know how life insurance proceeds are treated following an insured’s death. Read this guide and learn when proceeds go through probate and when they don’t.

What are some of the drawbacks of probate?

Probate may be a necessary process to families when there’s a very detailed will or trust that lays out exactly how everything is to be re-titled, but it’s still necessary to debt collectors who want to make claim for the money they’re owed. There’s a long list of reasons why people go through a long estate planning process to avoid probate, and that’s primarily because of all the drawbacks.

Here are some of the known problems with probate:

• Time it Takes to Settle- It can take anywhere from 9 months to 2 years to settle an estate that’s going through probate depending on whether there’s multiple beneficiaries or if the estate is taxable. If heirs have immediate expenses they were hoping to pay for with their inheritance, it might not happen because the funds will be tied up.

• Everything is Public Record- If you’re a private person, you can’t keep things private as soon as your estate goes to probate. This is because everything going through the probate courts is public record. This is because government agencies and creditors are free to see how much money is in the estate so that they can collect money that’s due.

• High Cost of Probate- When legal proceedings take place in court, someone has to pay for the time that it takes to appoint an administrator. The cost of probate depends on how much you’ve planned, but if there’s no will you can bet the fee will be high. According to the American Bar Association, the average fee for probate is about 3 to 8 percent of the estate, which is collected in the form of a lien.

• Contesting the Will- Not everyone will be happy with who’s been left in charge of an estate, and this can create problems within the family and in court. Anyone is free to contest a will as the estate sits in probate. If this happens, the judge must hear the claim, review evidence and then order whether or not the will be deemed valid in court. This creates problems, delays, and can cost a small fortune all while the public is free to see the squabble.

What assets will bypass probate?

While not many assets bypass probate all together, some do. Before you can avoid some of these drawbacks that are associated with probate, you’ll need to find out which assets are safeguarded and which are included in the process at all times. Here are some of the assets and scenarios that don’t lead to the typical and lengthy probate process:

• Life insurance (when structured properly)
• Pension plans
• Annuities
• Individual Retirement Accounts
• Buy and sell agreements
• Smaller estates worth less than $30,000 (in some states)
• Assets jointly owned by a surviving spouse
• Assets transferred to a revocable living trust
• Lifetime gifts

Why does life insurance typically bypass probate?

You may be curious to learn why the death benefit or annuity that’s paid out after death would pass to another outside of probate. The reason is because of how the policy is structured.

Life insurance is a financial contract where the owner agrees to pay premiums and life insurance company agrees to pay a death benefit to a specific person or entity upon the death of the covered individual.

Since the contract says who’s to be paid, the funds transfer directly to that beneficiary without having to be counted as an asset in the estate. Unfortunately, this doesn’t always happen and this is when problems can occur.

When might life insurance proceeds go through probate?

Life insurance only goes through probate when there’s no named beneficiary or entity. This is because when there’s no named beneficiary or no surviving beneficiary, the proceeds will be paid to the estate. Since the proceeds become part of the estate, they are immediately available to creditors to pay off debt and to make the estate more liquid.

Scenarios Where Proceeds go to Estate

Benefits can be paid to the estate in many different instances. Making mistakes when structuring your policy can be costly. Here are some scenarios that can pose a serious problem for you if you’re trying to bypass probate at all costs:

• No beneficiaries are named
• There’s no contingent beneficiary but the primary is deceased
• The policy owner named their estate as a beneficiary

What’s the harm in probate?

You probably buy life insurance to pass on a legacy or to help your family live comfortably. If proceeds go through probate, the money can be claimed by creditors and may also be eaten up in the form of estate tax and probate fees.

The key to avoiding probate when it comes to life insurance is to name a beneficiary. Consider naming multiple people or setting up a trust for added protection. Once you’ve planned how you will structure the policy, compare premiums by using an online quoting tool, and you’ll be equipped with all of the information you need. Compare life insurance rates now by entering your zip code in our FREE tool below!