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Insurance Beneficiary

Mark Cappel
UpdatedSep 7, 2010
Key Takeaways:
  • Insurance benefits are not subject to probate law.
  • Neither are 401(k) distributions upon death.
  • Watch out for unscrupulous collection practices

Does an insurance death benefit go through probate? How about a 401(k) distribution?

My husband (age 58) and I (age 57) have no assets except a term life insurance policy in his name (the beneficiaries are his two college-age daughters) and his 401K. Our debts are in each of our own names and we have no will. If he dies before I do, do his debts automatically get paid out of the life insurance policy, or does that still go to the girls? Do his debts get paid out of the 401K?

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 is not probated. It is outside of the reach of the decedent's creditors.

Death and Debt

When a person passes away, the decedent's debts do not automatically pass to his 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.

Frequently, creditors will contact the surviving relatives of a recently deceased debtor to try to convince them to pay the debt owed by their late relative, despite the fact that the relatives are not liable. These collectors will often say things like, "Don't you think your father would want you to honor his memory by paying this debt?" (I have heard that line before).

They often try to insinuate that a legal obligation to pay the debt exists, saying things like, "But you've been making the payments, so it looks like this is your debt." Sometimes, they even state outright that a relative is legally obligated to pay the debt, which in most cases is absolutely untrue. Under federal law, making untrue or misleading statements in an attempt to collect a debt is illegal.

As mentioned above, when an estate is probated, the decedent's assets are liquidated to pay off any creditors, and the remainder is distributed according the laws of the state (if the person dies without a will i.e., "intestate") or according to the decedent's will. Because the beneficiaries of a life insurance policy receive the benefits directly and not through the probate process, the benefits are not affected by debt owed by the decedent.

401(k) and Probate

If a 401(k) account holder dies, the amount in the 401(k) can be distributed in a lump sum or over time to the beneficiary the account holder designates. The beneficiary who receives the distribution may be subject to taxation, which is unlike other death benefits such as life insurance. If there is no beneficiary or the beneficiary pre-deceases the account holder, the distribution goes to the account holder's estate. When the distribution goes to the estate, it is subject to the rules of that state's probate court.

Here, if your spouse has designated you or your child(ren) as beneficiaries, and if your spouse dies with debt, the 401(k) beneficiaries will receive a distribution directly. However, if your spouse has not listed someone as a beneficiary, then the distribution will go to your spouse's estate where it will be subject to creditors' claims.

I hope this information helps you make better money decisions.