Budgeting Financial Planning Estate Planning When Life Insurance Is Part of an Estate By Julie Garber Julie Garber Julie Garber is an estate planning and taxes expert with over 25 years of experience as a lawyer and trust officer. She is a vice president at BMO Harris Wealth management and a CFP. Julie has been quoted in The New York Times, the New York Post, Consumer Reports, Insurance News Net Magazine, and many other publications. learn about our editorial policies Updated on May 21, 2022 Reviewed by Michael J Boyle Reviewed by Michael J Boyle Michael Boyle is an experienced financial professional with more than 10 years working with financial planning, derivatives, equities, fixed income, project management, and analytics. learn about our financial review board Share Tweet Pin Email In This Article View All In This Article When It's Part of an Estate No Surviving Designated Beneficiary Lack of Beneficiary Designation Form Different Rules Apply to Estate Taxes Frequently Asked Questions (FAQs) Photo: FatCamera / Getty Images Is life insurance part of an estate and available to pay a deceased person's bills? It depends on whether the life insurance policy had a living, designated beneficiary at the time of the policy owner's death. When Life Insurance Is Part of an Estate A life insurance policy has one or more designated beneficiaries if the decedent completed a beneficiary designation form for the policy before their death. If at least one of the designated beneficiaries survives the decedent, the life insurance proceeds pass directly to the beneficiary outside of probate. This is a critical distinction because the probate process deals with the decedent's creditors and pays their debts with available estate funds. When the insurance proceeds go directly to a beneficiary, bypassing the estate, the money belongs to the beneficiary. Friends, relatives, and insurance beneficiaries are not responsible for paying any debts the decedent left behind, so the money is out of the reach of their creditors. The life insurance proceeds don't have to be used to pay the decedent's final bills. If There Isn't a Surviving Designated Beneficiary If the decedent completed a beneficiary designation form prior but all of their beneficiaries predecease him, one of two things can happen. The life insurance proceeds will pass into the decedent's probate estate and become available to pay the decedent's final bills. The life insurance proceeds will pass directly to the decedent's living heirs-at-law, individuals so closely related to him that they would be legally entitled to inherit from him if he had not left a will. This can depend on state law and the insurance company's payment policies, but the bottom line is the same. The life insurance proceeds don't have to be used to pay the decedent's final bills unless they're payable to their estate rather than his heirs-at-law. If a Decedent Failed to Complete a Beneficiary Designation Form The same rules apply if the decedent failed to complete a beneficiary designation form before their death. Either the insurance proceeds will pass into the decedent's probate estate and be available for paying the decedent's final bills, or the proceeds will pass directly to their heirs-at-law, safe from creditors. Different Rules Apply to Estate Taxes These rules address debts in the deceased's sole name at the time of their death, as well as personal tax debts, but they do not apply to estate taxes that may be due if the value of their estate is significant. Related: Best Whole Life Insurance Policies Frequently Asked Questions (FAQs) How does life insurance create an immediate estate? People sometimes name their estates as beneficiaries of their insurance policies, possibly intending that the policy pay off their final bills. That sends the money directly into the estate. The same would happen if the insurance policy's beneficiary were to predecease the insured. When is life insurance included for estate tax purposes? A hefty life insurance policy payable to a deceased's estate might increase its value above the federal exemption amount so that estate tax would be due. In that case, the proceeds would be subject to taxation if the decedent personally owned the policy at the time of their death, or if they transferred ownership of the policy to someone else within three years of their death. Was this page helpful? Thanks for your feedback! Tell us why! Other Submit Sources The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy. Gudorf Law Group, LLC. "Does Life Insurance Have to Go Through Probate?" Boonswang Law. "Why Would a Life Insurance Policy Need Probate Papers?" Wespath. "Designate a Beneficiary." Canandaigua National Bank & Trust. "Six Life Insurance Beneficiary Mistakes to Avoid," IRS. "Estate Tax," Cornell Law School. "U.S. Code § 2035. Adjustments for Certain Gifts Made Within 3 Years of Decedent’s Death,"