Howard & Hardyman LLP

Life insurance and probate: what you need to know

Adults in the Rockford area explore many avenues to pass on assets after they die. One of those ways is to take out a life insurance policy that will pay out upon the death of the policy holder. However, who you name as a beneficiary can present issues that you may not expect for your survivors and your estate. You may even end up allowing your insurance policy to go through probate.

On some occasions, policy holders do not name a beneficiary on a life insurance policy at all. But according to the Motley Fool, by neglecting to name somebody to receive the benefits, your policy would likely become part of your estate. The benefits of the policy would transfer to the estate, which means the policy would pass through probate. It also puts your policy at risk for creditors to claim it.

Some policy holders will just name their estate as the beneficiary. However, Investopedia explains that you would experience the same problems with your policy as if you had not named anyone as a beneficiary. Your policy would still go through probate and the benefits included in the policy would still be subject to the claims of creditors looking to collect on old debts.

A simpler solution is to just name a person as your beneficiary, though some are reluctant to do so because the beneficiary could use the inherited payout from the policy for any reason. If you named a child on your policy and wanted your child to use the money in a certain manner, you would not have a way to enforce your wishes. Also, if your beneficiary is still a minor upon your death, the beneficiary may not be able to receive the death benefits right away.

Alternatively, people choose to name an irrevocable trust on their policy. This can solve the problems of probate or delayed payouts. Upon your death, your policy benefits would go to the jurisdiction of a trustee, not your estate. That means your policy will not go through probate and creditors cannot touch it. The trustee will possess latitude to dispense the policy benefits to the estate or withhold them. You can also set standards under which your policy benefits will be distributed.

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