Life insurance is a contract between the insurance company and the person insured. A third-party beneficiary receives the benefit of this contract directly when the insured dies. A benefit to a beneficiary is not probated. It is outside of the reach of the decedent’s creditors.
You raise the question, “Who is a life insurance policy’s beneficiary in a contract where no beneficiary is named?” I need to define a few terms and discuss probate law before addressing your question.
Death, Debt, Assets, and Inheritance
When a person passes away, the decedent’s debts or assets do not automatically pass to his or her spouse, children, or anyone else. Debts incurred by an individual are owed solely by that individual. If a person dies before his or her debt is paid, then the creditor can attempt to collect the debt from the individual’s estate, meaning that the debt would be paid before any money or other assets are passed to his or her heirs. However, if the person dies without sufficient assets to pay off the debt, then the debt is uncollectible and the creditor will likely write it off its books.
Although a surviving relative is not liable to pay debts of the deceased out of his own assets, the probate court may require that any property belonging to the estate be paid to creditors before the heirs receive any inheritance.
What is true for decedent’s debts is true for his or her assets. A deceased person’s assets are distributed according to the decedent’s will. If the decedent has no will, the assets are distributed according to the decedent’s state law. A court-appointed administrator pays the decedent’s debts and distributed the remainder to heirs according to the state’s rules. If a decedent has a spouse and no children, the surviving spouse inherits 100% of the decedent’s estate -- after debts are paid. If a decedent has children and a spouse, the children as a class receive 50% and the spouse receives 50%. However, if the decedent has a will, then an executor pays the debts and distributes the assets as directed in the will.
Life Insurance Beneficiary
If the decedent named a beneficiary or beneficiaries in the life insurance contract, the beneficiaries would receive the benefits directly and not through the probate process. Insurance benefits paid directly to the beneficiary are not affected by debt owed by the decedent.
However, if the decedent did not name a beneficiary, or wrote "my estate" as the beneficiary, then the benefit will go through the probate process. The benefit is treated like a bank account, mutual fund, or any other liquid asset owned by the decedent.
If your state follows the common law and your spouse had no will, then as discussed above, an administrator will tally your spouse’s assets and liabilities, pay off the liabilities, and split any remainder with you and your spouse’s children. You will get 50% and the surviving children will split the other 50%. If your spouse had a will, then it will contain instructions for dividing the assets.
Consult with a wills, trusts, and estates attorney in your state to learn the general rules for your state. An attorney will ask you questions about your individual circumstances, and advise you more precisely than my brief analysis above.
I hope this information helps you Find. Learn & Save.