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What happens to life insurance with no beneficiary?

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Having life insurance is an essential step in protecting your loved ones and ensuring they're taken care of financially should anything happen to you. When you buy life insurance, you generally designate a beneficiary—a person or organization you want to receive the policy's death benefit when you die.

But what happens to life insurance with no beneficiary? Without a valid beneficiary, your carefully laid estate plan can fall into limbo. Designating a beneficiary for your life insurance—and updating it as needed—enables your estate planning to work as intended.

Here's a quick overview of beneficiaries and what happens if the beneficiary dies before you—or if you don't identify a beneficiary at all.

What are the types of beneficiaries?

First, let's take a look at the options you have when naming a beneficiary for life insurance. The two basic types are primary and contingent:

Primary beneficiary

This is who will receive the proceeds of the life insurance contract when you die, generally directly and without having to go through probate. You might name one person, several people, a business partner, an organization, or another legal entity such as a trust. If your primary beneficiary dies or becomes ineligible, your contract details should say whether the death benefit payout will pass on to their heirs, be split among other surviving and eligible primary beneficiaries or go to a contingent beneficiary you've named.

Contingent beneficiary

Also known as a secondary beneficiary, a contingent beneficiary doesn't receive any of your life insurance proceeds if the primary beneficiary is alive and eligible. However, they'll be the next in line to get the payout if the primary beneficiary is unavailable or unable to accept it.

What if your life insurance has no beneficiary?

If you die without naming a beneficiary for your life insurance or if your designated beneficiary has died or isn't eligible and you haven't specified alternatives, it won't be clear who should receive the death benefit.

When a beneficiary can't be determined, the benefit is often instead paid out to your estate. The proceeds and the rest of your property and investments will be distributed according to your will, the insurance contract details and state law.

The contract will go into probate if there isn't a beneficiary on file. A will would provide instructions to probate court of the wishes of the deceased. The probate process can vary depending on state law. It typically involves a court approving an executor of the estate, locating and valuing the assets, paying taxes and other debts and, finally, distributing the remaining assets.

Under normal circumstances, the probate process can take a year or longer—potentially much longer if your will is contested. Your family members may eventually receive a payout, but it could be much less than the intended death benefit due to debt payoffs and taxes.

Typically, when someone receives a payout from a life insurance contract, the money can't be accessed by the deceased's creditors. However, if the proceeds are paid out to an estate, probate court then will determine how to allocate the payout. They can be earmarked to pay down any remaining debts of the deceased before being distributed to heirs. This could leave heirs without the financial protection the life insurance holder intended.

Without a valid beneficiary, it could be a lengthy and costly process for your loved ones to access the money. This is why designating a beneficiary—and keeping your records up to date—is so essential in estate planning.

When might a life insurance beneficiary be ineligible?

Life insurance beneficiaries can become ineligible in a few scenarios. In the most obvious cases, the primary and contingent beneficiaries have passed away before you.

However, there are other situations in which you might think you have a valid beneficiary named on your policy, but the way you've named them causes problems. Some scenarios include:

You're not specific enough about the beneficiary

When identifying your primary and contingent beneficiaries, include their full name, date of birth and Social Security number. Don't name your beneficiary generically, such as "spouse" or "children." If you divorce and remarry, generic beneficiary designations can cause a legal battle for the benefits.

You designated your estate as your beneficiary

If you have specific family members you want to receive the proceeds, don't designate your estate as your beneficiary. The insurance proceeds can become entangled in probate and taken by creditors rather than going to your intended heirs.

You designated a minor child as a beneficiary

If your beneficiary is a minor when you die, the court will appoint someone to be the custodian of the funds. The money will go into a special account, such as a trust or Uniform Transfers to Minors Account (UTMA), and the custodian will manage the funds and make withdrawals for eligible expenses until the child reaches maturity under state law. Typically, the courts will designate a surviving parent or the guardian named in your will as the custodian. However, if neither of these is available, how the custodian manages and spends the money might not coincide with your wishes. All of this could potentially be avoided if a valid trust is in place and named as the beneficiary of the contract.

You designated a pet as a beneficiary

You may want to ensure a beloved pet is cared for after you die, but an animal can't be a valid life insurance beneficiary. Instead, you may be able to set up a trust or designate a legal guardian to receive the life insurance proceeds on their behalf.

Your beneficiary is alive but incapacitated

If your beneficiary is in a situation where they are not in control of their own decisions at the time you die—for instance, due to a mental or intellectual condition—they may be deemed ineligible to receive the benefit. In cases where this is a known possibility, it can be useful to establish a trust ahead of time so that a trustee you've selected can manage and distribute the money for your intended beneficiary.

Why you should name beneficiaries & keep them updated

Naming primary and contingent beneficiaries for your life insurance policy is essential to ensure your estate plan works as intended and your beneficiaries receive the life insurance payments they are entitled to.

While you might identify a beneficiary when you purchase the contract, it's also essential to keep your beneficiaries updated as life circumstances change. Things like getting divorced or remarried, having a child, a minor child reaching legal age, or a beneficiary passing away or becoming incapacitated can mean it's time for a beneficiary update.

So how can you ensure your beneficiaries stay up to date? Beyond updating your life insurance beneficiaries as you go through major life stages, consider setting a calendar reminder to review your beneficiaries and make changes to reflect any new life circumstances. You might do this every two to five years as part of a holistic estate planning update or once a year as part of an annual financial check-in with yourself or your financial advisor.

Ensure your life insurance creates a smooth transition

Not naming a beneficiary on your life insurance can mean financial uncertainty and an extended probate process for your loved ones. Taking the initiative to ensure your life insurance beneficiary is current and valid can help you feel more confident that your legacy will be passed down efficiently and in the way you choose. A Thrivent financial advisor can help you make a plan for properly naming and updating your life insurance beneficiaries and ensuring the rest of your estate strategy is in good shape.