There are generally two ways that a life insurance policy could become payable to the estate of a deceased person. The first is if a person actively names their estate as the beneficiary. The second is if no named beneficiary is alive to receive it. In either case a probate will likely be the result!
ACTIVELY NAMING YOUR ESTATE AS BENEFICIARY
I have been an estate planning since 1994 and I really can’t think of a great reason to name your estate as the beneficiary of a life insurance policy. The only thing I can imagine would be the beneficiary you want to provide the policy to is a minor and you don’t have time or money to properly prepare an estate plan. Some policies have default provisions for beneficiaries if one isn’t named. Thus, if you fail to name any beneficiary it could be paid to your next of kin you don’t want. In most instances you would just actively name the person you do want to receive it. However, if they are minors paying it to your estate would probably be better than nothing. Even then it’s a stretch. Maybe if there is a minor beneficiary involved, you don’t have time to properly plan and you don’t want the minor’s parent involved!? I don’t know. I am reaching here trying to justify why anybody would name their estate as beneficiary of a life insurance policy. Suffice it to say it’s not a good idea.
DEFAULT TO YOUR ESTATE WHEN NO LIVING BENEFICIARY
This is the much more common situation than the first above. This actually happens a fair amount. It comes up in two situations. The first is when someone just forgets to name a beneficiary. The second is when the named beneficiary has died before the person whose life insurance policy is involved. In either case the payment, if the company has no default provisions for next of kin, will pay to the estate. Thus a probate is the outcome.
DIRTY LITTLE SECRET
Actually, there is a third which I think is the dirty little secret of the life insurance industry. It’s the lost beneficiary designation forms. Let me start by saying I have no proof of this so it’s just my theory. I have had several cases over the years where someone has died with no named beneficiary. The family has been certain that their mom/dad/other had named a beneficiary. “They were so organized they would have had a beneficiary for sure.” I even had one case where my client presented a copy of the beneficiary form and it had the received stamp from the life insurance company but they showed no record of it. My theory is that over the years life insurance companies went from paper forms to computer files. I think many beneficiaries were lost during this transition. Again, I have no actual proof and am not saying it was intentional but I think it happened.
In any of the above situations a probate is likely. The issue becomes what is the total of the life insurance policy and what other assets are there. If the policy is the only asset subject to the probate laws then a full probate can be avoided if the total is less than $150,000. Note it is LESS than $150,000 so a policy of exactly $150,000 would not qualify. If less than $150,000 then a probate code 13100 small estate affidavit should work. If it’s $150,000 or more then you need to do a full probate. There is one caveat that some people, who have a living trust, can qualify for a Heggstad petition to get the policy into the trust if there is no named beneficiary; but not if the estate is actively named by the decedent.
Name your beneficiaries right! Talk to your estate planning attorney. Talk to your financial adviser. Generally speaking your trust or a responsible adult, or adults, should be directly named. Also, take the time to name contingent beneficiaries. Most life insurance companies allow secondary back-ups too. Fill that space up with names because you never know!