Life insurance enables an individual to purchase a policy that, in the event of their death, will distribute financial benefits to their surviving loved ones who are named by the policyholder in the documentation. It is a popular option for persons who wish to ensure the financial security of their family or another party. Yet life insurance is not without potential complications. Among these is the possibility that the life insurance policy will have to go through a lengthy probate process before any benefits can be distributed.
The good news is that, in general, life insurance claims do not go through probate. In most cases, the money is distributed directly to beneficiaries listed in the policy, without the need for court intervention. However, there are important exceptions to this rule, and those are what we will focus on here.
Life Insurance: The Basics
A life insurance policy is fundamentally an arrangement made with an insurance company to provide a tax-free lump-sum payout—known as a “death benefit”—to certain named parties after the death of the policyholder. The insured person is required to make premium payments according to a given schedule (monthly, semi-annually, or annually) to maintain a valid life insurance policy. These policies are available in many different types; here are some of the more common options offered by insurance companies:
- Term life insurance – This type of insurance is valid for a limited period of time, usually 5, 10, 15, 20, 25, or 30 years. It is most often used to provide financial security to beneficiaries if the insured person dies during their employment years.
- Universal life insurance – This form of life insurances gives the policyholder wide latitude in adjusting the death benefit and the premiums to be paid. The insured person is also permitted to withdraw funds when needed. Unlike term life insurance, universal life policies are intended to cover the entire lifespan of the policyholder.
- Whole life insurance – This form of insurance requires fixed premiums, but the value of the policy increases in a consistent manner. Whole life policies also provide annual dividends. Like universal life insurance, it covers the entire lifespan of the policyholder.
How the Death Benefit Is Distributed
Upon the death of the insured person, the value of the policy is paid out to the named beneficiaries. Some policies have only one beneficiary, while others have multiple beneficiaries. In cases where more than one beneficiary is named, the policyholder can decide how much should go to which party—the death benefit is not necessarily divided equally among the recipients. If the precise ratio of distribution is not specified, then the benefit will be divided equally.
What happens if a named beneficiary dies before the insured person does? If there is a co-beneficiary named in the policy, then they will receive the portion that was to be allocated to the deceased beneficiary.
Another option with life insurance policies is to name a contingent beneficiary—i.e., a party who is next in line to receive the death benefit. If there is no primary beneficiary available to accept the benefit, then it is automatically passed on to the contingent beneficiary. This occurs without the need for probate court. That’s why it is generally advisable to name a contingent beneficiary in your life insurance policy—it can prevent a lot of trouble.
When Do Life Insurance Claims Go to Probate?
There are cases involving the distribution of life insurance benefits that require probate court to sort out the issue. Probate court specializes in the administration of estates, the enforcement of wills, the distribution of life insurance benefits, and related matters. Whenever there is no available legal beneficiary for a life insurance policy that is due to be paid out, probate court enters the picture to adjudicate the problem.
Life insurance claims will likely go to probate if any of the following conditions arise:
- There is no living beneficiary – If the named beneficiaries die before the insured person does, the death benefit cannot be paid out to them. Why does this happen? People often forget that they need to update their beneficiary designations if their intended recipient passes away. In these situations, the policy is sent to probate.
- There is no beneficiary named on the policy – When no beneficiary is specified on the life insurance policy, the benefit may become part of the policyholder’s estate, which will require probate. Often, though, the insurance company will try to locate a living relative of the policyholder to accept the benefit.
- The beneficiary refuses the benefit – Beneficiaries are allowed to refuse the money if they so desire. When this happens, the beneficiary is treated, for legal purposes, as a deceased person. The benefit would then pass on to a contingent beneficiary or another qualified party; if this isn’t possible, it becomes a matter for probate to sort out. The same rule applies if the beneficiary is presumably alive but cannot be located.
- The beneficiary is a minor – A life insurance company will not pay a death benefit directly to an individual who is legally considered a minor. Under New York State law as it pertains to life insurance policies, a minor is anyone under the age of fourteen years and six months.
- The estate is the named beneficiary – It is permissible for a policyholder to list their own estate as the beneficiary. This frequently happens when the policyholder wishes to increase the overall value of their estate. However, this option means that the death benefit becomes part of the estate, and subject to the oversight of probate court.
- The beneficiary is vaguely identified – Sometimes it just isn’t clear who the beneficiary is supposed to be. This can happen when the beneficiary is identified by some potentially ambiguous label like “my neighbor” or “my cousin.” That’s why it’s best to ensure that all beneficiaries are explicitly described—by name, Social Security number, and/or any other information that makes it easy to identify them.
The foregoing is not a complete list of circumstances that can require the intervention of probate court to adjudicate a life insurance payout.
Wills and Life Insurance
Some people assume that the stipulations of their will can override the terms of their life insurance policy. They attempt to use their will to make revisions, so to speak, to their policy. They may add or subtract life insurance beneficiaries in their will, or make another type of amendment. It might seem to be an agreeably easy way to make changes to a life insurance policy without needing to fill out a lot of paperwork.
The problem with this approach, however, is that a will does not supersede a life insurance policy, which is a legal document with the force of the law behind it. To put it another way, if there is a conflict between a person’s life insurance policy and their will, the life insurance policy wins out.
Contact Joseph A. Ledwidge, P.C.
With 20 years’ experience in the field, Joseph A. Ledwidge, P.C., is the legal advocate you need on your side when it comes to navigating the New York State probate process. He is a member of the New York State Bar Association and the Queens County Bar Association. Our firm represents parties involved in many kinds of probate, estate administration, trust administration, and spousal estate rights matters. To contact a New York probate attorney, please call our office at 718-276-6656 today. A free consultation is available.
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