Heritage Law Group
How does life insurance get handled in an estate?
Like retirement plans and many other financial accounts, proceeds from life insurance policies typically do not pass through a person's estate. In other words, upon the death of the insured, the insurance company will pay the proceeds directly to the person named as a beneficiary on the policy.
There is at least one possible exception to this rule, and that is if the person insured under the policy specifically says the proceeds should pass in to the person's estate or, for that matter, in to a trust.
In addition, the proceeds may go in to a person's estate if there is no named beneficiary available to claim the proceeds, such is in cases where all of the named beneficiaries have died. For this and other reasons, it is obviously very important for a person who holds a life insurance policy to make sure he or she keeps the names of the intended beneficiaries up-to-date with the insurance company.
San Jose residents also need to be aware of certain tax issues related to life insurance proceeds. At the federal level, income from a death benefit is not taxable. However, should a beneficiary choose to take the proceeds in installments or via an annuity, interest earned may well be taxable. Other tax-related issues may apply, depending on one's particular situation.
Life insurance policies can constitute a large part, even the majority, of a person's assets. For this reason, it is very important that a person consider such policies in his or her overall estate plan.
Because they have favorable tax treatment, life insurance can, in some cases, even be used to help families save on their tax bills and accomplish other financial and personal goals. However, like other assets, they must be considered carefully and with due attention to details. An attorney with experience setting up wills and trusts, as well as other estate plans, can be helpful in this respect.