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INSURANCE ISSUES IN PROBATE
In this article we discuss the following insurance issues:
LIFE INSURANCE AND PROBATE, and
INSURANCE ON HOMES AND AUTOS IN PROBATE, and
ACCIDENTAL DEATH INSURANCE
Life Insurance & Probate:
In Most Cases Life Insurance Proceeds are not Probated
Life Insurance policies obviously name a beneficiary to get the money when the insured person dies. The policy will name a primary beneficiary who gets all the money if that person is alive when the insured person dies. Usually, the policy will name a contingent beneficiary (or group) who will get the money if the primary benficiary does not survive the insured person. For example, if President Obama had bought a life insurance policy when he was starting his family, the primary beneficiary probably would have been his wife and the contingent beneficiaries his two daughters. In this example, the life insurance proceeds would not have to go through Probate unless some common accident killed both parents and both children. In that case, there would have to be a probate to get the life insurance money to Obama's closest surviving relative. See If You Die without a Will
Trusts and Life Insurance
Note that in the above example, the contingent beneficiaries are minors. If both of the parents died while the daughters were minors, the insurance money would go into a blocked minor's account (see Probate Words and Terms) and then each daughter could have her half of the money on her 18th birthday. Since President Obama is a lawyer he probably gave some thought to who he would want to manage his daughters' money while they were minors and he probably gave some thought to whether he would want each of his daughters to receive her entire share of the life insurance proceeds upon turning 18.
Very possibly Obama (even before he became rich) would have made his wife the primary beneficiary and a trust for his children the contingent beneficiary. That way his trust could provide who would manage his daughters' life insurance money if something happened to him and his wife, and Obama could specify under what conditions the trust money could be spent both before and after his daughters turned 18. Probably now that Obama has a lot more money a trust is the beneficiary of his life insurance even if his wife survives him.
Probate of Life Insurance Proceeds
In the examples discussed above, whether the life insurance proceeds go to an individual or to a trust, the life insurance proceeds are usually given without a Probate proceeding.
But let us continue our example of Dad taking out life insurance naming Mom as primary beneficiary and children as contingent beneficiaries. What if Mom, Dad and kids all are killed at the same time in some tragedy. If only individuals were named as primary or contingent beneficiaries, the life insurance company wouldn't have any clear direction on who to pay the death benefit to. In that case the life insurance proceeds would have to be probated. The life insurance proceeds in most cases would be like a savings account that the insured person had kept in his or her sole name. (If a trust was named as the primary or contingent beneficiary, probably the trust language would state who would get the proceeds if all of the immediate family were killed.)
Many people get a certain amount of life insurance through their employment. Because they didn't make a conscious decision to buy a life insurance policy they may not have put much thought into naming beneficiaries. Perhaps, the person just named his or her spouse and didn't bother with contingent beneficiaries. Now, if the spouse or sole beneficiary predeceases the insured person, the proceeds have to be probated as part of the estate of the insured person. However, in anticipation of this problem we sometimes see in employer provided life insurance policies a provision that if there is no named beneficiary alive at the insured's death, the policy payment will be made to the insured's spouse, or, if unmarried, to the insured's children in equal shares.
But, what if the insured person dies and then, before the proceeds are paid, the sole beneficiary dies? The proceeds can't be paid to a dead person. In that case the employer or life insurance company will say that the proceeds can't be paid until the estate of the primary beneficiary is probated.
We recently got a call from a person who had received notice from a U.S. government agency that an employee had passed away, only his wife was listed as a beneficiary of death benefit, and that the agency had information that the wife had died after the employee died. The government agency said that it would pay the death benefit to the estate of the wife if someone would initiate a probate proceeding for the wife. In this case the probate proceeding would probably give the death benefit to the next of kin of the wife. See Probate Words and Terms. (Incidentally, if you want to know if someone is alive or dead and you have that person's social security number you can call the Social Security Administration and they will tell you if they have information that the person is alive or dead. This is public information.)
Insurance on Homes & Autos in Probate:
Suppose Husband and Wife live in House, but House is titled only in name of Husband. Suppose Husband dies and Wife continues to the live in the House without bothering with a probate. As long as Wife pays the taxes and utilities and assuming no one else comes forward to claim the House, Wife will appear to be enjoying the House without having bothered with a probate.
The problem here is that House will be insured in Husband's name. Now, let's say the house burns down. Wife has been making the House insurance payments faithfully after Husband died so she expects Insurance Company to pay for the cost of rebuilding House. But, when she makes the claim Insurance Company may say, "Too bad. You are not the insured. We don't have to pay." (Whether Insurance Company can actually get away with this denial is a complicated issue.) To avoid this problem there should be a probate transferring title of House to Wife.
Likewise, when someone dies, even if the heirs undertake a probate they should contact the insurance company insuring the house and advise of the death of the owner and ask what paperwork is necessary to make sure that there is coverage during the probate process.
Another problem arises with autos. What happens if the estate Executor is driving the car of the person who died while trying to sell the car and there is an accident that is the fault of the Executor. The executor will want insurance protection. Therefore, when someone dies the executor should inform the insurance company of the decedent's vehicles and arrange for coverage through the estate proceeding.
Accidental Death Insurance
Fortunately, America is a pretty safe place and most Americans, don't die from an accident. Instead, most of us die from a disease, or plain old age.
So it is not surprising that a number of insurance companies offer accidental death life insurance (also called accidental death insurance or accidental life insurance) or mortage insurance that pays off only if the mortgage borrower dies in an accident. Large death benefits can be offered for small premiums because it is unlikely that there will ever be a payment of a death benefit.
As people get older, the distinction between an accidental death and a death from a disease can get blurry. For example, Grandpa, who has a history of strokes, is found dead face down on his floor with a bruise on his forehead. Did he just stumble and fall and smack his head so hard on the floor that it killed him? Or did he have a stroke that caused him to fall and maybe he died from the underlying stroke or maybe he died from the fall which was caused by the stroke. This is an issue that can involve a lot of money and one that we as attorneys can help with. Since insurance companies aren't generally dumb and since older people are more likely to die from a fall than younger people, some insurance companies provide that accidental death coverage stops at a certain age, for example, 70. Of course, if the insurance company keeps collecting the annual premium for accidental coverage on such a policy after the insured has turned 70, the insurance company may have to pay a claim for accidental death if the person dies from an accident after the age of 70 and never concealed his or her true age.
However, it should be noted that the medical phrase, "cerebral vascular accident," sometimes found as the cause of death on a death certificate, means the same thing as stroke. If the cause of death is "cerebral vascular accident," this diagnosis is not going to help make a claim under an accidental death policy. Sometimes on a death certificate the phrase, "non-traumatic cerebral vascular accident" is used to make clear that death was caused by an ordinary stroke. But at other times the shorter phrase, "cerebral vascular accident" is used to mean the same thing. Only a cause of death listed as "traumatic cerebral vascular accident" would suggest an accident that would trigger a payment under an accidental death life insurance policy.