LIFE INSURANCE AND PROBATE
In Most Cases Life Insurance Proceeds are not Probated
Life Insurance policies obviously name a beneficiary to get the money when the insured person dies. The policy will name a primary beneficiary who gets all the money if that person is alive when the insured person dies. Usually, the policy will name a contingent beneficiary (or group) who will get the money if the primary benficiary does not survive the insured person. For example, if President Obama had bought a life insurance policy when he was starting his family, the primary beneficiary probably would have been his wife and the contingent beneficiaries his two daughters. In this example, the life insurance proceeds would not have to go through Probate.
Trusts and Life Insurance
Note that in the above example, the contingent beneficiaries are minors.If both of the parents died while the daughters were minors, the insurance money would go into a blocked minor's account (see Probate Words and Terms) and then each daughter could have her half of the money on her 18th birthday. Since President Obama is a lawyer he probably gave some thought to who he would want to manage his daughters' money while they were minors and he probably gave some thought to whether he would want each of his daughters to receive her entire share of the life insurance proceeds upon turning 18.
Very possibly Obama (before he became rich) would have made his wife the primary beneficiary and a trust for his children the contingent beneficiary. That way his trust could provide who would manage his daughters' life insurance money if something happened to him and his wife and Obama could specify under what conditions the trust money could be spent both before and after his daughters turned 18. Probably now that Obama has a lot more money a trust is the beneficiary of his life insurance even if his wife survives him.
Probate of Life Insurance Proceeds
In the examples discussed above, whether the life insurance proceeds go to an individual or to a trust, the life insurance proceeds are given without a Probate proceeding.
But let us continue our example of Dad taking out life insurance naming Mom as primary beneficiary and children as contingent beneficiaries. What if Mom, Dad and kids all are killed at the same time in some tragedy. If only individuals were named as primary or contingent beneficiaries, the life insurance company wouldn't have any clear direction on who to pay the death benefit to. In that case the life insurance proceeds would have to be probated. The life insurance proceeds in most cases would be like a savings account that the insured person had kept in his or her sole name. (If a trust was named as the primary or contingent beneficiary, probably the trust language would state who would get the proceeds if all of the immediate family were killed.)
Many people get a certain amount of life insurance through their employment. Because they didn't make a conscious decision to buy a life insurance policy they may not have put much thought into naming beneficiaries. Perhaps, the person just named his or her spouse and didn't bother with contingent beneficiaries. Now, if the spouse or sole beneficiary predeceases the insured person, the proceeds have to be probated as part of the estate of the insured person. But, what if the insured person dies and then, before the proceeds are paid, the sole beneficiary dies? The proceeds can't be paid to a dead person. In that case the employer or life insurance company will say that the proceeds can't be paid until the estate of the primary beneficiary is probated.
We recently got a call from a person who had received notice from a U.S. government agency that an employee had passed away, only his wife was listed as a beneficiary of death benefit, and that the agency had information that the wife had died after the employee died. The government agency said that it would pay the death benefit to the estate of the wife is someone would initiate a probate proceeding for the wife. In this case the probate proceeding would probably give the death benefit to the next of kin of the wife. See Probate Words and Terms.
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