How a life insurance policy might end up in probate

As New York residents may know, having a life insurance policy as part of the owner’s estate may have an effect on both taxes and probate. The manner in which the owner sets up the policy might have unintentional consequences when the time comes for the proceeds to be disbursed. While a married individual may assume that the proceeds from an insurance policy goes to the spouse, it is still a good idea to not only name the spouse on the policy as a beneficiary, but to also name an alternate beneficiary in the event something should happen to both married partners around the same time.

An insurance policy that does not include the name of a beneficiary, even though the owner is married, may be treated as part of the estate and end up going through the probate process . This can be time delaying and costly, particularly if the owner had significant financial oblgiations. While creditors may make a claim on an estate, a life insurance policy with a named beneficiary is not treated as part of the owner’s estate and the proceeds are disbursed to the named beneficiary directly. Naming a minor child as a beneficiary in a life insurance policy also requires consideration. Since a minor cannot receive funds directly from a policy, the policyholder may wish to consider either naming a custodian or having the funds placed in a trust for the child.

When a life insurance policy is a part of a comprehensive estate plan, consideration should be given to whether the proceeds from the policy might end up in probate, potentially reducing the amount the beneficiary might receive. As a result, those wanting to purchase such a policy may wish to discuss the alternatives with an attorney.

Source: The Motley Fool, “Buying Life Insurance? Don’t Make These Mistakes with Beneficiaries” , Selena Maranjian, March 6, 2015