| By :
Shane Flait
When you purchase a life insurance policy on your life, you can obviously designate a beneficiary for its death benefit. But if there's no live or designated beneficiary, it'll go into your estate's probate process with its own beneficiaries. Here's why you should avoid letting this happen... Ideally, you designated a beneficiary for your life insurance when you purchased your life insurance policy. If you were undecided at that time or the person you designated has since died, then you - or rather your estate - will be the beneficiary at your death. Then your will (or if no will, your state rules) will determine how that death benefit will be consumed and disbursed under the probate process. That's why you must update your policy and decide on whom to designate as its beneficiary. Not doing so will undermine a lot of the benefits that the life insurance death benefit payout can give to your beneficiary. When you update your beneficiary, you can name more than one and give each a specified percentage of the benefit. For instance you could leave 30% to each of your 3 children and 5% to each of your 2 grandchildren. But letting your estate receive the death benefit undermines a lot of the benefits that life insurance proceeds afford to your 'named' life insurance beneficiaries. That's because not having a viable life insurance beneficiary allows your state probate process to take the death benefit proceeds and first distribute it according to how the rest of the estate is divided up according to your will. Or, if you don't have a will, it will be divided according to your state's distribution laws for those who die intestate. *Benefits to named beneficiaries versus leaving the policy to your estate: Let's compare how the benefits for designated life insurance policy beneficiaries compare to letting your estate be the beneficiary with its probate process. The first comparison is speed of disbursement. In most cases life insurance companies pay the life insurance to the policy's designated beneficiaries as soon as a claim is filed. On the other hand, if the estate receives the proceeds eventual disbursement of these proceeds to whoever are the probate process beneficiaries can take quite a while. That's because the probate process is slow and the estate money is also subject to disputes among the beneficiaries of the will, if there is one. The next comparison is taxes. Life insurance death benefits when disbursed are free of income tax obligations for its individual beneficiaries. But life insurance owned by you and designating you as beneficiary will the value of its proceeds included in your estate - and therefore subject to estate tax. But left to the estate, the proceeds will be subject not only to estate taxes directly, but also estate income tax during the probate process before eventual disbursement to the probate process beneficiaries. Lastly is the comparison on debt liabilities of you. If you die with outstanding debts owed by you, your life insurance beneficiaries receive the insurance proceeds free of your debt obligations and your creditors don't have access to the proceeds. But if the proceeds go to your estate as beneficiary, creditors and bill collectors are obliged to be paid out of your estate's value before any payments go to the probate process beneficiaries - i.e. of your will or your state rules for inheritance. So update your life insurance policy beneficiaries since it's to their benefit that you paid for the insurance in the first place.
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