Probate Case Study - Life Insurance

Introduction

Good morning! My name is Christopher Ha and I’m an attorney specializing in probate, wills, and estate law.

I’m Board Certified in Estate Planning in Probate Law (Texas) and I’ve been helping clients in the Lakeway and Austin area since 2009.

Intended Benefit of Blog Post to You

I hope this blog post helps answer some of the common questions I’ve seen clients ask about probate and claiming life insurance benefits.

Disclaimer – I’ll try to cover the most common life insurance scenario I’ve seen. However, please note that this blog post is for discussion purposes and there are often exceptions to the rules explained here. Please consult an attorney for advice specific to your situation!

Side note: the beneficiary designation examples below also generally apply to IRAs (Traditional or Roth), 401ks, and other retirement plans but with different income tax results since retirement plans and life insurance policies typically have different tax rules.

What Is the Probate Process?

Probate is the process where we get a signed court order giving an Executor (or Administrator) official signing authority for assets in the name of a deceased person.

An Executor (or Administrator) also receives Letters Testamentary (or Letters of Administration) which prove to third parties such as life insurance companies, banks, and investment houses that the Executor has official signing authority for assets in the Decedent’s name.

Why Would I Need to Go Through the Probate Court Process for Life Insurance?

Great question!

GENERAL CASE FOR LIFE INSURANCE: The owner of a life insurance policy fills out the beneficiary designation on a life insurance policy so the life insurance company knows who should receive the life insurance policy’s death benefit when the insured person dies.

GENERAL LIFE INSURANCE EXAMPLE: Rick buys a $1,000,000 life insurance policy that insures his life. He fills in the beneficiary designation so that the death benefit pays 100% to his wife, Ilsa, on his death, if she survives him.

Assume that Rick dies and Ilsa survives him. Who gets the $1,000,000 death benefit under Rick’s life insurance policy?

In this case, Ilsa is named as the 100% beneficiary of Rick’s life insurance policy and she survived her husband.

Once Ilsa fills out the insurance company’s claim form and verifies her identity the life insurance company is bound to pay her the $1,000,000 death benefit according to the instructions in the beneficiary designation.

THE PLOT THICKENS: In some cases, the owner of a life insurance policy will forget to fill in (or leave a blank!) on the beneficiary designation form that controls where a life insurance policy pays out at death.

Say that Ilsa predeceases Rick in the example above and the beneficiary designation DOES NOT name a back up beneficiary for his life insurance policy.

Who gets the $1,000,000 death benefit in this case, where Ilsa did NOT survive Rick?

In this case, the life insurance policy belongs to Rick’s Estate and will be controlled by the provisions of his Will.

The life insurance policy does not pay the $1,000,000 to Ilsa because she predeceased Rick and the beneficiary designation required her to survive Rick in order to get the death benefit.

Because the $1,000,000 belongs to Rick’s estate, the life insurance company will only release the $1,000,000 to the Executor who has legal authority to sign for Rick’s estate.

Absent very strange circumstances, the life insurance company will almost certainly demand to see court paperwork (e.g., Letters Testamentary from a court) from anyone claiming to be Executor to ensure they are paying the $1,000,000 death benefit to the right person and not a fraudster off the street.

Please allow us elaborate with an additional example!

ADDITIONAL EXAMPLE: CINDERELLA

Facts for Cinderella example:

Cinderella’s Mom buys a $1,000,000 life insurance policy on her life.

Cinderella’s Mom named the following beneficiaries on her life insurance policy:

Primary Beneficiary – her husband, 100%.

Contingent Beneficiary – instruction is left BLANK!

For this example, assume that Cinderella’s Dad died FIRST, and then later Cinderella’s Mom died a year later.

Cinderella is the only daughter of her Mom and Dad. They did not have any other marriages nor did they have or raise any other kids.

Assume Cinderella’s Mom left a valid Texas Will that leaves everything to her only daughter, Cinderella.

Does Cinderella inherit the $1,000,000 life insurance death benefit?

We know that Cinderella SHOULD get the $1,000,000 death benefit because that’s what Cinderella’s Mom wants to happen in her valid Will.

HOWEVER, the life insurance company doesn’t know Cinderella from Adam. From the life insurance company’s point of view Cinderella is an unwashed street urchin!

When Cinderella calls the life insurance company and mails them a copy of Mom’s Will and Death Certificate the life insurance company has a problem.

How does the life insurance company know that the Will is REAL? Could the Will be a FAKE? Nowadays with fancy color printers it is very easy to print authentic looking documents. Banks and life insurance companies are confronted by fraudsters all the time.

As they say – this is why we can’t have nice things!

Say the life insurance company is first reached by an IMPOSTER who produces a FAKE Will. Then the insurance company pays $1,000,000 to the IMPOSTER who immediately vanishes never to be seen again.

Does the life insurance company still owe $1,000,000 to the REAL Cinderella?

DEFINITELY. The life insurance company is bound by the insurance policy to pay the proper beneficiary (Cinderella) EVEN IF the life insurance company mistakenly paid $1,000,000 to an IMPOSTER.

If the life insurance company has any sense of self preservation, the life insurance company is almost certainly going to demand Letters Testamentary from a court to prove that they are dealing with the legally appointed Executor (signer) for the Estate of Cinderella’s Mom before they release the $1,000,000 death benefit.

Absent the possibility that Cinderella has a direct line to the CEO of the life insurance company who can override the rules, Cinderella should expect that she’ll need to go through the probate court process with her Mom’s Will and get Letters Testamentary so she can convince the life insurance company that she is the proper signer for her Mother’s Will so they can pay her the $1,000,000 death benefit.

What To Expect Next?

We hope this is helpful!

Please feel free to contact us (see Home Page for contact information) if you would like advice for your specific situation!

Homework item - it doesn't hurt to check the beneficiary designations on your life insurance policies and retirement accounts for unexpected surprises!