When a loved one dies, there are a lot of questions you have to deal with, not the least of which is how to pay for a funeral and other death expenses. A life insurance policy could help, but the deceased must have made sure the proper beneficiary is named. If at least one beneficiary is not designated, some problems with the estate could arise or the life insurance could go to the decedent’s estate. The same is true if the one beneficiary preceded the decedent in death. You might want to name more than one primary beneficiary, according to the laws of your state, or a contingent beneficiary.
A financial advisor can help you see that all the pieces of an estate plan are in place when you need it.
What Is a Beneficiary and How Do I Name One?
A life insurance policy is a contract that you enter into with a life insurance company. When you set up your life insurance policy, you have the right to name one or more beneficiaries who will receive the proceeds of the insurance policy upon your death. You pay premiums on the policy until your death to guarantee your beneficiaries that right.
You might name only one beneficiary who will receive all the proceeds. If you are married and choose more than one primary beneficiary and if you live in a common law state, there may be legal ramifications and your spouse may have to give their consent. It is best to research the laws of your state, or your financial advisor will, if you choose to go this route. You can even specify the percentage of your life insurance proceeds that each primary beneficiary gets.
In addition to the primary beneficiary, you can name contingent beneficiaries. They only receive the proceeds of life insurance if the primary beneficiary predeceases the life insurance policyholder.
It is important to list as much identifying information about your beneficiaries as possible so, in the event of your death, they can be easily found and there are no mix-ups. It is also important to keep your life insurance policy up to date regarding identifying information of your beneficiaries.
What Happens If You Don’t Name a Beneficiary?
If you don’t name a beneficiary, the situation will arise with your estate named as life insurance beneficiary. Another similar scenario is if you choose to name your estate as your beneficiary. If there is one beneficiary that is alive after the policyholder is deceased, the proceeds of the policy will go to that beneficiary and not the estate.
However, if there are no beneficiaries still living, either the proceeds of the policy will enter the probate process, or the life insurance proceeds will pass to the decedent’s heirs-at-law who are those people who are close to the decedent and would probably inherit if there was a beneficiary designation or will. Heirs-at-law are also defined as those people who will inherit your assets if you die intestate. Dying intestate means dying without a last will and testament in place.
If a decedent’s life insurance proceeds go to the heirs-at-law, then they are safe from creditors. Alternatively, your life insurance proceeds could go to settle your outstanding bills and financial obligations unless a beneficiary is named. Some set up a life insurance policy payable to their estate for this reason.
Life insurance proceeds, if they push the decedent’s estate above the estate tax exemption, are subject to estate tax. For 2022, the estate tax exemption is $12,060,000. For 2023, it is $12,920,000.
Dying without a beneficiary in place or leaving your estate as beneficiary of your life insurance policy have different rules from state to state. Always check on your state’s rules and the rules of the life insurance company when you are setting up your life insurance policy and will.
The Bottom Line
If you have heirs or an organization to which you want to leave your estate, it is seldom the best idea to allow the estate to receive the proceeds of a life insurance policy. It is lumped in with the rest of your estate and can even cause estate tax to be assessed depending on the value of your estate.
Tips on Life Insurance Planning
- If you’d like help with the often-complex estate planning process, consider working with a financial advisor. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Check out SmartAsset’s estate planning guide for state-by-state assistance with estate planning.
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