Is Life Insurance Part of an Estate If Not Listed in a Will?

By Stephanie Kurose, J.D.

Is Life Insurance Part of an Estate If Not Listed in a Will?

By Stephanie Kurose, J.D.

If a life insurance policy names a beneficiary, then it is not part of an estate regardless of whether it appears in a person's will. However, if the policy holder fails to designate a beneficiary, then it does become part of the estate. Many people take out such policies for themselves so that when they die, their loved ones have some money to keep them afloat financially. Typically, when a person purchases it, they simultaneously name either one or more beneficiaries to inherit the money upon their death.

Greying couple and blonde woman looking over document on clipboard

Life Insurance Policy Basics

A life insurance policy is essentially a contract between the insurance company and the person who buys it, also referred to as the policy holder or owner. It can insure either their life or someone else's. While they are still alive, the policy owner pays premiums to the insurance company. In exchange, the insurance company pays a lump sum to the policy's named beneficiary upon the death of the insured.

Life insurance policies only become part of an estate if the policy owner directs the insurance company to pay the estate upon their death or if they neglect to name a beneficiary. In the latter case, the policy becomes part of the estate by default.

Regardless of whether it becomes part of the estate or passes to the named beneficiary, it is still subject to federal estate taxes, which could be as high as 45 to 47 percent of its value. If the estate is the beneficiary of the policy, most states require the insurance company to pay the probate court directly. The court then uses the money to pay probate and attorney fees and distributes the remaining balance according to the terms of the deceased's will.

Trusts Named as Life Insurance Policy Beneficiaries

In order to avoid hefty estate taxes, the policy owner can name an irrevocable life insurance trust as the beneficiary. Upon death, the trust receives the money without having to pay taxes on it. The money can then be transferred to whomever was designated in the trust. Although it creates an additional step in the process, this option allows the desired beneficiary to receive the benefits without having to pay nearly half of it in estate taxes.

However, once you set this up, you cannot amend or modify it any point thereafter. The policy owner loses the right to borrow from the policy because it is owned entirely by the trust. That's why you'll want to consider whether or not it makes sense for you to set up an irrevocable trust as opposed to creating a revocable one, which will give you the ability to modify it at any time.

Whether your life insurance policy becomes part of your estate does not depend on whether it appears in your will. Rather, it depends on whom you name, or fail to name, as the policy's beneficiary. Keep this information in mind when drafting a policy to ensure that your named beneficiaries and estate don't face issues after your death.

This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not LegalZoom, and have not been evaluated by LegalZoom for accuracy, completeness, or changes in the law.