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
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
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.