Throughout the next six weeks we’ll be rolling out our top reasons for owning cash value life insurance. We’ll be releasing these posts during our Friday post. Today we start with reason number six on our list, the probate skipping process that life insurance uses when the death benefit is paid.
Probate is a colloquialism to the (somewhat) orderly fashion in which assets are distributed when someone dies. The reference is to the Court that officiates this process, the Probate Court–unless you live in New York where it’s called the Surrogate Court, but such silliness is to be expected from a state that thinks assault and battery are the same thing and the Supreme Court is simply the ante-penultimate court of the land.
So when someone talks about “probating” an estate, they merely are referencing the process of officially distributing assets from the deceased’s estate to the his or her desired and named (hopefully) heirs.
For many assets (take your savings account for example) the probate process is necessary to move the assets from the deceased to someone else. For the most part the pomp and circumstance (either of which there is generally very little in most cases) is in place to stop you from leaving your creditors high and dry and allowing the government to collect a few court filing fees in the process.
In the United States, the death of a human citizen is a lot like the death of a legal corporation. Bond holders sit near the top of the pile when it comes to prioritizing who gets paid. When someone dies, and there is an estate that is opened, any outstanding debts held by the individual are paid for with assets in the estate before any named heir can be paid.
And this seems fair. After all a legal debt is an obligation entered into by two parties to a contract. One party has agreed to lend money while the other has agreed to repay that loan at some level of interest within a specified period of time or else face certain pecuniary consequences.
But just like those smart guys at Enron who catapulted off the ship using their golden parachutes to land safely, you too can ensure that not all of your assets are included in the feeding frenzy if creditors line up outside the funeral home looking to speak with your executor/executrix.
Life insurance, like 401k’s ,IRA’s, and annuities are private contracts between the policy owner (and in this case the insured) and the issuing company. And these private contracts have beneficiary elections, and the process of paying a beneficiary (i.e. executing the provisions of the contract) has no probate requirement. And because of this, it’s entirely possible to move money to someone else after you die without that money being considered part of your estate.
Please note that while these products do avoid the probate process they do not avoid the estate tax process.
Want to know what the rich old guy who just died left to his grandson as per his Will? It might be in the local newspaper, or you could simply take a leisurely stroll down to the court house and pull up the records.
The probate process is public. Who gets paid and what they got paid is all a matter of public record. Now, may not matter a whole lot to those who love to live conspicuously, but for those who’d rather not see Johnny III be assaulted (in the non-tort sense) by pitch-men looking to sell him on the latest penny stock this whole public record stuff is a little less than ideal.
If you happen to be the…”inquisitive”…type and have actually looked up court records regarding someone’s estate, you’ll likely notice that there are a few items that a rarely ever mentioned and life insurance is one of them (you can also probably tell me who is behind on their property tax bill, but we can talk about that another day).
Unless someone wants to mention life insurance in his or her Will, and their attorney is foolish enough to let them do it, you won’t see it mentioned. Why? Because that private contract takes care of the transfer without any need of probate intervention—we covered that already. And because there is no probate process needed, there is no public record. Johnny III has his money, and no one else but you and the insurance company has to know about it. “Tarnations to good planning!” exclaimed the town gossip.
Not the probate process, that can take f o r e v e r. The processing of a death claim on the other hand? A few weeks; maybe a month tops—providing the contract isn’t within the contestability period.
You don’t have to wait for an attorney to commence the probate process, or the executor to kick off the process with the attorney. Or better yet the administrator to get things started with an attorney—if you got the reference good for you, if not you may be headed for a huge financial headache.
Nope, instead you simply file the claim paperwork with a death certificate and within a few weeks the insurance company sends you a check book. That’s right typically a check book from which you can draft payments as the money will remain in what is known as a retained account from which you can draft checks unless or until you decide to take it out—totally up to you on when and how.
So you can skirt the probate process with life insurance, and this has a myriad of benefits. You can tell your creditors sorry your loved ones are more important. Make sure that what you leave behind doesn’t become a topic for discussion at the local gas station gossip corner, and get the money to your family, friends, or whomever you wish before the attorney even contacts the court house for your Will. Just be sure to keep your beneficiaries up to date. If you die without any, or they've passed away, the proceeds are paid to your or their (your beneficiaries) estate meaning you just required that the funds be probated.
Oh and one last thing. It's expensive. You didn't think the attorney was going to file all that paperwork for free did you?
And this is only one of the many benefits of cash value life insurance used as an asset? So why is it that some people suggest it’s a bad idea? We ask ourselves this exact question every day.
Brandon launched the Insurance Pro Blog in July of 2011 as a project to de-mystify the life insurance industry. Brandon was born in Northern New England, and he currently calls VT home. He attended Syracuse University and graduated with a triple major in Economics, Public Administration, and Political Science.
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