Life Insurance Payouts: How Estates Process Death Benefits

Life insurance policies pay out when you pass away, including death benefits to designated beneficiaries. Naming beneficiaries under your life insurance policy will provide death benefits without going through probate. These benefits can help provide for your family members and loved ones in a time of need.

If you do not name your life insurance beneficiaries, the payout will be delayed while it goes through probate. For more information about how estates process death benefits for life insurance, talk to a local estate planning attorney. 

Do You Need Life Insurance?

Life insurance is part of a comprehensive estate plan that provides for your loved ones when you die. A life insurance policy pays out benefits to your beneficiaries upon your death.

The decision to purchase life insurance will depend on your individual situation. If you’re a single person without any dependents or beneficiaries, you may not need life insurance. However, if you’re taking care of aging parents or providing for a family, life insurance may be worth the cost. 

Life insurance is generally a good option for people with beneficiaries, as it provides financial support if the policy owner dies. For example, new parents with young children often get insurance coverage to provide for their children and spouse in the event of an unfortunate accident. 

Get Top Estate Planning Guidance and Advice

Use the Super Lawyers directory to find the most experienced estate planning attorneys near you who can help you craft a plan that protects your legacy.

Find a lawyer today

Types of Life Insurance Policies

There are many different types of life insurance policies, including: 

• Term life insurance
• Whole life insurance/permanent life insurance
• Group life insurance
• Variable life insurance

Term life insurance provides coverage for a set period of time. For example, a 20-year term life insurance plan provides coverage for 20 years. At the end of the term, the insured is no longer covered and recovers none of the premiums paid.

Term life insurance is generally less expensive than permanent insurance and can be a good option for younger people with a family to ensure their loved ones are provided for in the event of a sudden fatal accident. 

Whole life insurance builds cash value after the period of coverage. The insured can borrow against the guaranteed insurance and may be able to cash out the account when they no longer need coverage. Whole life policies can apply for the rest of your life. However, permanent insurance policies cost much more than term life plans. 

How Does a Payout for Life Insurance Work?

When a covered policyholder passes away from a covered cause of death, the designated beneficiaries receive an income tax-free death benefit from the insurance company.

The beneficiaries (generally a spouse, children, or parents) file a claim with the life insurance company to receive the funds. The life insurance company generally requires evidence of death, such as a death certificate. 

Life insurance payouts transfer outside of probate and override a will or other estate documents. In some cases, a death benefit is not subject to claims by creditors who may seek to recover assets in the estate to pay off debts. 

Your life insurance policy generally has one or more beneficiaries who receive the life insurance proceeds. You can split your life insurance between beneficiaries, allocating a percentage to each one. You can also name a contingent beneficiary if the named beneficiary passes away, and change your primary beneficiaries at any time.

If you have a $100,000 life insurance policy, your beneficiaries receive a $100,000 lump sum payout upon your death. If you allocate 50% to beneficiary A and 50% to beneficiary B, each receives a $50,000 death benefit payout. 

Some life insurance policies include an annuity payout, providing regular payments to the beneficiary. However, life insurance annuities are less common than in the past.

Life Insurance Benefits as Part of Your Estate

If you do not have a beneficiary designation on your insurance policy, your estate may receive the payout. The money from your estate is distributed according to your will or trust. If your estate receives your life insurance payout, it will go through probate. 

If you do not have a will, your property transfers under intestacy. Intestate succession varies by state law. It generally goes to your spouse, then to your children, then to your parents, and so on. If you have no living relatives, your property passes to the state. 

Life Insurance Exclusions

Life insurance plans, like any other type of insurance, have exclusions that do not cover certain causes of death. For example, most life insurance policies do not cover suicide by the insured person within the first year of coverage. Life insurance also has exclusions for policyholder misrepresentations, such as failure to disclose a serious illness.

Common life insurance exclusions include: 

• Suicide clause
• Illegal activity
• High-risk activities (skydiving, scuba diving, etc.)
• Acts of war
• Acts of terrorism
• Drug or alcohol abuse
• Material misrepresentations

Make sure you understand your policy exclusions, coverage, and terms of the contract. If your policy does not provide the necessary insurance coverage, you can shop around or purchase additional insurance. Talk to an estate planning attorney to get the type of insurance that provides for your family if you should pass away. 

Life Insurance and Estate Planning Help With an Attorney

Life insurance is an important part of a comprehensive estate plan. With proper estate planning, your property, assets, and life insurance death benefits can pass to your heirs and beneficiaries without going through probate. Probate is more time-consuming and expensive than passing your property outside of probate.

For legal advice about processing death benefits under a life insurance policy, talk to an estate planning lawyer.