Life Insurance Policies Can Become Part of an Estate After Death


Many Arizona residents are covered by a life insurance policy. Whether the policy’s death benefit is $10,000 or $1 million, the point is usually the same — to cover the cost of your burial and funeral, and provide income for your surviving family members.

In rare but significant cases, a life insurance policy may also be intended to buy out a deceased business partner’s share in a company, or to cover the cost of estate taxes for wealthy individuals.

In all of these examples, it’s safe to say that going through probate would be a serious nuisance. Sending a life insurance death benefit through probate would take months to transfer the funds to family members, and the funds would be subject to outstanding debts.

The good news is that in most cases, a life insurance death benefit is not part of your estate when you die. As long as you list a third-party beneficiary, the death benefit will transfer to the beneficiary outside of probate. The transfer should take place in a matter of weeks after you pass away, and the funds are not subject to your outstanding debts. 

Of course, that’s assuming you structure the life insurance policy correctly, and that there aren’t any conflicting issues in your will or estate that drags the life insurance policy into court.

In this article, we’ll cover everything you need to know about life insurance policies and probate, including:

  • How to ensure a life insurance policy is not part of your estate
  • When a life insurance policy is part of a decedent’s estate
  • How working with an attorney can help
  • FAQs about life insurance and estates
  • What to do if you need help

How to Ensure a Life Insurance Policy is Not Part of Your Estate

Estate plans and probate law can be complicated, but in this case the matter is relatively simple. In order to ensure your life insurance policy isn’t included in your estate, the death benefit must transfer to a living third-party beneficiary.

Designating a beneficiary is part of the life insurance application process, so this should be taken care of from the get-go. If you ever need to change or add beneficiaries, it’s as easy as submitting a form to your insurance company.

To avoid running into a situation where the beneficiary is deceased, it’s a good idea to designate contingent beneficiaries who may receive the death benefit if the primary beneficiary dies before the insured. 

When a Life Insurance Policy is Part of a Decedent’s Estate

There are two situations that may lead to a life insurance policy becoming part of the decedent’s estate.

First, life insurance policies that list the insured as the beneficiary will become part of the insured party’s estate when he or she dies. Fortunately, this is easy to avoid by designating a third-party beneficiary.

Second, life insurance policies that don’t have a living beneficiary may become part of the insured party’s estate. For example, if the beneficiary is your spouse and he or she dies at the same time as you in a car accident, the death benefit would go to your estate.

This situation is also easy to fix, in this case by designating contingent beneficiaries to receive the life insurance death benefit if the primary beneficiary is deceased. 

Drawing from the same example as before, listing your children as contingent beneficiaries is a good backup plan in case you and your spouse (the primary beneficiary) pass away at the same time. 

Note, however, that minor children cannot own assets and therefore cannot legally receive a life insurance death benefit. You would need to create a trust for your children, or the court would need to appoint a conservator to administer the funds on the child’s behalf until they turn 18.

How Working with an Attorney Can Help

You don’t need an attorney to designate primary and contingent beneficiaries for your life insurance policy, nor do you need an attorney to change the beneficiary once the policy is active. 

However, you will need to work with an attorney to set up a trust for minor children who are designated as beneficiaries. This may involve establishing a living trust immediately for the children’s benefit, or it could involve instructions to establish a testamentary trust when you die. Either way, trusts are complicated entities that require the help of an attorney.

An estate planning attorney can also help you to create a comprehensive estate plan. This may include a will, power of attorney, advance healthcare directive, and, if necessary, one or more trusts that allow more of your assets to transfer to beneficiaries outside of probate.

FAQs About Life Insurance and Estates

Q: Is life insurance considered part of an estate?

As long as the life insurance policy lists a living third-party beneficiary, the death benefit is not considered part of the decedent’s estate.

Q: Is life insurance part of probate?

No. Like other assets that utilize a designated beneficiary (e.g. trusts, retirement accounts, and bank accounts with a TOD beneficiary), life insurance death benefits transfer directly to the beneficiary outside of probate.

Q: What happens to a life insurance policy if the beneficiary is deceased?

As long as the life insurance policy has a contingent beneficiary who is living, the death benefit will go to them. If the policy doesn’t have any living beneficiaries, the death benefit would become party of the decedent’s estate.

Q: Is there a time limit for claiming life insurance death benefits?

There are no time limits for beneficiaries to claim a life insurance death benefit. It’s a good idea to start the process as soon as possible, but if you need some time to emotionally recover from the death of your loved one, it’s perfectly acceptable to wait.

Once you initiate the claim, the life insurance company should process the death benefit within 30 days.

What to Do If You Need Help

Crafting an estate plan is often easier than it sounds, especially when you have the assistance of an experienced estate planning attorney. A good attorney can structure your estate plan to avoid probate as much as possible, allowing a quick and seamless transfer of assets to your beneficiaries when you pass away.

If you have a high net worth that’s subject to estate taxes, it’s even more important to work with an attorney to craft an estate plan. With advance planning, a good estate planning attorney can help you limit estate taxes through trusts and gift tax exemptions.

Call our Arizona Estate Planning team at (480)467-4325 to discuss your case today.

Contact The JacksonWhite Estate Team

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