Life Insurance Payouts: Are They Public Or Private?

Life insurance payouts generally become part of the public record unless certain steps are taken to keep the information private. This includes using a trust to distribute the proceeds to beneficiaries without going through probate court, choosing a private placement policy, and considering a life settlement. It's important to note that laws and regulations surrounding life insurance policies and death benefits vary by state and country, so consulting with a financial advisor or attorney is recommended.

Using a trust to keep the death benefit payout private

When a life insurance policy pays out a death benefit, it usually becomes part of the public record unless certain steps are taken to keep the information private. One option to keep the death benefit payout private is to use a trust. A trust is a legal contract that ensures your assets are managed according to your wishes during and after your lifetime.

A trust can be created specifically for the purpose of holding the life insurance policy, and the beneficiaries can be named in the trust document. When the policy pays out, the proceeds are distributed to the trust, which can then pass them on to the beneficiaries without public disclosure. This is because a trust agreement stays private and does not go through probate court.

In addition to maintaining privacy, trusts can also offer tax benefits, flexibility, and specific parameters for the use of your assets. For example, you can include conditions such as age attainment provisions or parameters on how the assets will be used. Trusts can also be helpful if you become ill or disabled, as they allow your trustee to manage your assets, pay bills, and file tax returns on your behalf.

It is important to note that the laws and regulations surrounding life insurance policies and death benefits vary by state and country. Consult with a financial advisor or estate planning attorney to determine if using a trust is the best option for your specific situation.

Private placement life insurance (PPLI)

PPLI combines the financial advantages of highly taxed hedge funds and similar investments with the tax advantages of life insurance. The tax savings and death benefits of a PPLI policy can more than make up for the insurance and administrative costs. The insured person can generally access most of the funds tax-free, through policy withdrawals and loans.

PPLI is often referred to as "private banking insurance" or "insurance wrappers". It provides a planning structure that allows an internationally diversified portfolio to be enveloped within the legal structure of a life insurance policy. This results in a series of desirable wealth planning benefits.

PPLI offers increased confidentiality due to insurance secrecy laws and, in some cases, lower or no reporting obligations due to tax-privileged growth. The death benefit payout of a PPLI policy can be kept private as it is not subject to the same reporting requirements as publicly traded policies.

To purchase a PPLI policy, one must be an accredited investor as defined by the Securities and Exchange Commission (SEC). This typically means having a net worth of at least $1 million, excluding their primary residence, or an income of at least $200,000 for each of the two prior years.

A life settlement

The life settlement provider becomes the new owner of the life insurance policy, and they will pay any future premiums. The buyer will receive the death benefit when the insured person dies. The amount of the payment will depend on a range of factors, including the policyholder's age, health, and the policy's terms and conditions. This payment is generally more than the policy's cash surrender value but less than the net death benefit.

The life settlement provider may then resell the policy to other parties. It is important to note that not all life settlement transactions are regulated, so it is recommended to research the purchasers of life settlements to see if they are licensed and regulated.

There are a few factors to consider when deciding whether to sell a life insurance policy through a life settlement:

• Ongoing life insurance needs: Consider whether you will be able to get a new policy with equivalent coverage, and at what cost.
• Less costly alternatives: There may be other options to get cash, such as borrowing against the policy or pursuing accelerated death benefits if you have a long-term or terminal illness.
• Difficulty determining fair prices: It can be challenging to know if you are getting a fair price for your policy, so it is important to shop around and get multiple offers.
• Impact on your finances: The lump sum payment may be taxable and could negatively impact your ability to receive public assistance.
• Impact on your survivors: Consider the future financial needs of your survivors and whether they may need the proceeds from the policy.
• Access to your health information: The buyer of your policy will have access to personal information about you, including your health status, and you may be required to provide periodic updates about your health.

Avoiding probate

Life insurance payouts can become part of the public record unless certain steps are taken to keep the information private. One such step is to avoid probate. Probate is a legal process that proves a last will and testament is valid. It is time-consuming, expensive, and makes the deceased person's finances a matter of public record. Here are some ways to avoid probate:

Designating a beneficiary

Life insurance policies are payable directly to designated beneficiaries. Proceeds from a life insurance policy do not become part of the estate and, therefore, do not need to go through the probate process when the beneficiary is anyone other than the estate itself.

Use a trust

A trust can be used to keep the death benefit payout private by distributing the proceeds to beneficiaries without going through probate court. The trust can be created specifically for the purpose of holding the life insurance policy, and the beneficiaries can be named in the trust document.

Use payable-on-death (POD) accounts

For banks, certificates of deposit, and similar financial accounts such as IRAs or 401(k)s, an easy way to avoid probate is to designate someone as a beneficiary in the event of death. This is generally preferable to joint ownership of the account since the POD beneficiary has no rights to the accounts until death occurs.

Use transfer-on-death (TOD) accounts

Transfer-on-death is another way to bypass probate and streamline asset transfer from government bonds, mutual funds, stocks, brokerage accounts, securities, and other security-related holdings. The Uniform Transfer-on-Death Securities Registration Act, which all states except Louisiana and Texas have adopted, allows you to designate a beneficiary and specify the percentage of your assets they will receive upon your death.

Create living trusts

To avoid probate, most people create a living trust commonly called a revocable living trust. It is "revocable" because you may revoke it at any time. In a living trust, the trust is the owner of the assets and not you. Thereby, assets in the trust can skip probate. This is often the best choice for a large estate or if there are many beneficiaries. Another advantage of living trusts is that they ensure privacy, unlike creating a will.

Locating a lost policy

Locating a lost life insurance policy can be a challenging task, but there are several steps you can take to find the information you need. Here is a comprehensive guide to help you in your search:

Search for Physical and Digital Copies:

Start by looking for a physical copy of the policy. This includes searching through paper files, safe deposit boxes, and other storage spaces for insurance-related documents. Check for any correspondence or notices from insurance companies, as well as bank and credit card statements that might show premium payments. If you have access, also check the deceased's email and digital storage for any relevant information.

Contact Financial Advisors and Legal Professionals:

Reach out to the deceased's financial advisors, such as their accountant, attorney, financial planner, or banker. These individuals may have records of their life insurance purchases or knowledge of their insurance plans. If the deceased had an insurance agent for other types of insurance, such as home or auto insurance, they may also know about additional policies.

Utilize Online Policy Locator Tools:

The National Association of Insurance Commissioners (NAIC) offers a free Life Insurance Policy Locator Service. This online tool assists in locating life insurance policies by searching participating companies' records. You will need basic information about the deceased, such as their social security number, legal name, date of birth, and date of death.

Contact the State's Unclaimed Property Office:

When an insurance company is aware of a deceased client but cannot locate the beneficiary, they must turn the death benefit over to the state as "unclaimed property." You can search the state's unclaimed property database, especially if you know or can guess the state where the policy was purchased. The National Association of Unclaimed Property Administrators provides a search tool to access these records.

Check with Past Employers and Associations:

Review the deceased's employment history and professional affiliations. Employers sometimes provide term life insurance or whole life insurance options. Additionally, the deceased may have been a member of a fraternal or professional association that offered a policy as a benefit.

Search Company Websites:

Some major life insurance companies provide online search tools or policy locators on their websites. These tools can help potential beneficiaries determine if they are eligible to collect benefits.

Consult with Family Members and Estate Executors:

Speak with family members or the executor of the deceased's estate. They may have knowledge of any existing life insurance policies or related documents. Ensure that you have access to any safe deposit boxes or storage locations where important documents may be kept.

It is important to note that there is no national database for all life insurance policies. However, by following these steps and conducting thorough research, you can increase your chances of locating a lost life insurance policy.

Frequently asked questions