Life Insurance Without Beneficiaries: What You Need To Know

Life insurance is an important way to protect your loved ones and ensure they are taken care of financially when you pass away. When you buy life insurance, you usually need to name at least one beneficiary, but you can also name multiple beneficiaries and decide how much of the death benefit each will receive. However, there are situations where no beneficiaries are available, which can cause delays in the payout of the death benefit and even result in it not being paid out according to the policyholder's wishes. This is because the death benefit may need to go through probate court, a lengthy and costly legal process where the court determines how the assets are distributed. To avoid this, it is important to regularly review and update your life insurance policy, naming at least one primary and one contingent beneficiary.

If there's no beneficiary, the payout goes to the insured's estate

Life insurance policies require the policyholder to name at least one primary beneficiary. However, if the primary beneficiary dies before or simultaneously with the insured and no contingent (secondary) beneficiary is named, the policy's payout goes into the insured's estate. The "estate" encompasses all assets possessed by the decedent at the time of their death, including cash, bank accounts, personal items, real estate, investment accounts, debts, and liabilities.

Once the death benefits are paid to the estate, they become part of the probate process, which can be lengthy and complex. The assets are typically used to pay off any debts, including estate taxes, back taxes, mortgages, credit card debt, and legal judgments. Any remaining assets are then distributed to the decedent's heirs and beneficiaries according to the will. If the decedent died without a will, the estate will pass to the next of kin, usually the spouse and children, and then to the next-closest group of relatives if there is no surviving spouse or children.

The probate process can result in the insured's heirs receiving less than the original death benefit and cause delays in receiving the payout. To avoid this, policyholders should regularly review and update their primary and contingent beneficiaries. Consulting with a financial or tax advisor can help navigate the specific circumstances and potential consequences.

The payout may be subject to a lengthy probate process

If you have a life insurance policy and no living primary beneficiaries or contingent beneficiaries, the payout will go to the insured's estate. This means that the payout may be subject to a lengthy probate process, which can take a few weeks to more than a year. Probate is the legal process where a court determines how your assets, including life insurance policies, are distributed if you have not specified your wishes.

The probate process can be costly, with court fees and legal costs reducing the eventual payout. This can be particularly true if there are multiple heirs, as there may be legal disputes and conflict among loved ones. As a result of this process, the insured's heirs may ultimately receive less than the policy's original death benefit, and it will take longer for them to receive it than if they were named as beneficiaries of the policy.

To avoid the probate process, policyholders should regularly review and update their primary and contingent beneficiaries. It is also important to keep beneficiaries informed about their status as a beneficiary, so that they are aware of how to retrieve important policy-related information and documents.

Heirs may receive less than the original death benefit

If you have no living primary beneficiaries or contingent beneficiaries, your life insurance payout will go to your estate. This means that your heirs may receive less than the original death benefit. This is because the money will be subject to estate taxes and claims by creditors. The probate process can also be lengthy, which will delay the payout.

To avoid this, it is important to regularly review your life insurance policy and name at least one primary and one contingent beneficiary. This will ensure that your heirs receive the full death benefit and that the process is as quick as possible.

If you are unsure about who to name as your beneficiary, you should consult a financial or tax advisor. They can help you understand the specific details of your situation and make sure that your wishes are carried out.

It is also important to keep your beneficiaries informed about your policy. While there is no deadline for claiming a life insurance payout, it is helpful for your beneficiaries to know about the policy and have the necessary information to file a claim. This will make the process easier for them during what is likely to be a difficult time.

The payout may be subject to estate taxes and claims by creditors

If you have no living primary beneficiaries or contingent beneficiaries, the payout from your life insurance policy will go into your estate. This means that the payout will be subject to estate taxes and claims by creditors.

Estate taxes are an entirely different matter from income taxes. When you pass away, the executor of your estate will have to file IRS Form 712 as part of your estate tax return. Form 712 states the value of your life insurance policies based on when you died. If your spouse is your beneficiary, the life insurance payout is not taxed and will be passed on to them fully, along with the rest of your estate that was left to them. Spouses typically have an unlimited exemption with regards to estate taxes.

If your beneficiary is anyone other than your spouse, your life insurance payout will typically be added to the value of your estate. This is fine if the total value of your estate is less than the federal and state exemptions. However, if your total estate has a greater value than is exempted, any amount over the exemption is subject to estate and inheritance taxes.

Federal estate taxes apply to the value of your estate that exceeds $12.06 million per individual. It will be subject to a tax rate of up to 40%. The exact percentage is based on the taxable amount of the estate. There are 17 states, plus Washington, D.C., with an inheritance or estate tax. The estate tax exemption amount varies by state but ranges from $1 million to $7 million. Tax rates can be as high as 20%, depending on where you live.

One way to avoid life insurance payouts being taxed as part of your estate is to set up an irrevocable life insurance trust (ILIT). You transfer ownership of the policy to the ILIT and cannot be the trustee. However, you can determine who you want as the trust beneficiary. While an ILIT is an effective way to ensure that your life insurance death benefit is not taxable as part of your estate, there are a couple of situations in which you may still face a tax event.

The insured's loved ones may face a costly and lengthy probate process

Life insurance is an important step in protecting your loved ones and ensuring they are taken care of financially when you pass away. When you buy life insurance, you usually have to name at least one beneficiary, and you can also name multiple beneficiaries and decide what portion of the death benefit each will receive.

However, if you pass away without naming a beneficiary or if your designated beneficiary has died or is ineligible, the death benefit payout will go into your estate. This means that it will be subject to estate taxes and claims by creditors. The probate process can be lengthy and complicated, and it may take years before your loved ones can access your assets. During this time, court fees and legal costs can reduce the death benefit payout.

The probate process typically involves a court approving an executor of the estate, locating and valuing the assets, paying taxes and other debts, and finally distributing the remaining assets. This process can take a year or longer, and even longer if the will is contested. As a result, the insured's heirs may receive less than the policy's original death benefit, and it will take longer for them to receive it.

To avoid this, policyholders should regularly review and update their primary and contingent beneficiaries. By keeping your beneficiaries up to date, you can help ensure that your loved ones receive the financial protection you intended and avoid the costly and lengthy probate process.

Frequently asked questions