What Happens to a Life Policy with No Beneficiary?

When you purchase a life insurance policy, one of the big questions is “who should receive the policy benefit?” The beneficiary could be a spouse, child, or business partner. But what happens when the person being insured outlives the beneficiary?

A life insurance policy is a binding contract. So, when the insured person passes away, the life insurance company must pay the policy benefit to the named beneficiary. However, if a valid beneficiary is not specified or if the beneficiary pre-deceases the insured person and the beneficiary has not been updated, the policy benefit goes to the insured person’s estate.

From there, the deceased person’s estate goes into probate. As explained by two fellows of The American College of Trust and Estate Counsel (ACTEC), the probate process:

…appoints somebody to gather the assets of the estate to determine what debts the decedent left behind including what taxes are owed and then takes those assets, pays the bills, and then distributes whatever is left to the beneficiaries who are entitled to his assets.

Now that your life policy benefit is part of the estate, it is subject to estate taxes and could be used in combination with your other assets to pay any outstanding debts. In addition to taxes and pay-out of debts, there is also the cost of a probate attorney. After everything’s said and done, your family may not receive the full life policy benefit after going through probate.

One of the advantages of having a life insurance policy is that it allows you to leave funds to your family without having to go through this probate process. But, if your life policy doesn’t have a valid beneficiary, it defeats the purpose.

You can help avoid this situation by making sure your beneficiary designation is up-to-date and is valid:

  1. Make sure Beneficiary is valid. For example, minors should not be listed as beneficiary. If you would like a young child to be the beneficiary of your life policy, you should consider setting up a trust for the child and then naming the trust as the beneficiary.
  2. Designate a Contingent Beneficiary. A Contingent Beneficiary is the person who would receive the policy benefit if the Primary Beneficiary pre-deceases both the insured person and the Contingent Beneficiary.
  3. Make sure your beneficiary is up-to-date. Have you recently gotten married? Was there a birth of a new child? Have you gotten divorced? Make sure your life insurance benefit goes to the right person.

Talk to your agent about changes in your life and updating the beneficiary on your life policy. It is always good to do a review. You may find that your life insurance needs have changed and your agent can guide you to a solution.