The property in your name when you die will become your estate, and what happens to that property will have a profound impact on how people remember you and the lives your closest loved ones leads after your death. What instructions you leave behind will determine what happens with your belongings.
Some of those assets will have to pass through probate court before you can transfer them to others. Especially if you die unexpectedly young, your life insurance might be one of the most significant resources you leave for the people that you love.
If you work a professional job, you might carry a six or seven-figure life insurance policy to replace your wages, cover your debts and support your family. Will the proceeds of that policy become part of your estate for the purposes of estate tax calculations or creditor claims?
Life insurance can end up as part of your estate
In theory, the way that you structure your life insurance policy can keep it out of probate court. With the right paperwork, the funds paid out can transfer directly to the beneficiary you chose. However, if you make your estate the beneficiary of your insurance policy, then the proceeds will obviously have to go through probate court and will be subject to estate taxes if applicable and creditor claims.
The best way to ensure that your life insurance will not be part of your estate is to not mention it in your estate documents. Instead, you can file beneficiary designations with the insurance provider that will ensure the right person receives the proceeds directly from the insurance company when you die. The funds won’t have to pass through probate and therefore will not trigger estate taxes or end up subject to creditor claims.
Choosing not to include your life insurance and your estate plan is a smart decision anyway, as contradictions between your estate planning documents and your insurance paperwork might give you and your beneficiaries inaccurate ideas about what will happen with your life insurance proceeds when you die. Learning the rules that apply to your assets in probate court will help you create a more effective estate plan.