Life insurance is a contract between the insurance company and the person who buys the policy. Because insurance proceeds aren’t an asset the policyholder owns before his or her death, the proceeds don’t need to go through probate. In fact, life insurance can be a quick and welcome source of cash for surviving family members, who can usually claim the proceeds soon after death, with a minimum of paperwork. If you're an executor, you may be called on to help beneficiaries who aren’t sure where to start.
There are several different kinds of life insurance policies, some of which expire and some of which don’t. (Of course, regardless of the kind of insurance, required premium payments must be made for the insurance to stay in effect.)
Term insurance is in effect only for a certain number of years; it’s common for someone to buy this kind of insurance with a term of 10 or 20 years. Unless the policyholder renews the policy when the term ends, the coverage ends. Many "whole life" policies and "universal" policies, by contrast, can last until the policyholder dies, no matter when that happens. Some of these policies may last only until the policyholder reaches a certain age, however.
If you’re not sure whether or not a policy is still in effect, call the company that issued it. If you have the policy number and are the named beneficiary, the company will probably give you the information you need.
The policy should tell you who is named as the beneficiary of the policy. Many policies name both a primary beneficiary and alternate or contingent beneficiaries as well. For example, it’s common for someone to name his or her spouse as the primary beneficiary, and the couple’s children as the contingent beneficiaries. The contingent beneficiaries are entitled to the policy proceeds only if the primary beneficiary is no longer alive at the policyholder’s death.
Divorce can cause a wrinkle in this straightforward process. It’s more common than you might think for a policyholder to name his or her spouse as the policy beneficiary, and then divorce—but never get around to changing the beneficiary designation. In that situation, the result usually depends on state law. Some states provide that divorce automatically revokes beneficiary designations; others don’t. If the life insurance was provided by the deceased person’s employer, then federal law applies, and the insurer is required to simply pay the proceeds to the named beneficiary, without regard to state rules.
With term life insurance, the payment is simply the face amount of the policy--$25,000 or $100,000, for example.
With whole life or universal life policies, which provide an investment as well as insurance coverage, the beneficiary may also be entitled to dividends attributable to the part of the premium that was invested. If the policyholder had borrowed against the policy—this is allowed with some universal and whole life policies, but not term policies—the amount of the payout will be reduced.
Beneficiaries can usually choose to receive a lump sum benefit or installments (with interest). Many companies also encourage beneficiaries to leave the money with them, in some kind of investment account. Beneficiaries need to know that they don’t have to do that—they’re entitled to take the money and invest it wherever they please.
Many companies ask the beneficiary to fill out a simple claim form, which is then submitted to the company with a certified copy of the death certificate and the original insurance policy. Someone who is claiming as a contingent beneficiary will need to send a death certificate of the primary beneficiary as well. Of course, if the company wants the original policy document, the beneficiary should make a copy before dropping it in the mail.
To get a claim form, the beneficiary can usually just call the company, though some insurers make downloadable forms available on their websites. Phone numbers are available on company websites or premium statements from the company.
If you're having trouble finding the information, your probate attorney may be able to help dig it up.