Do Executors Get a Share of Life Insurance or Annuities?
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One of the first questions many families may have in mind after the passing of a loved one is who receives the life insurance payout. And if an executor is managing the estate, some wonder whether that person has a right to part of the policy proceeds. An executor does not automatically receive a percentage of life insurance or annuity payouts unless they are also named as a beneficiary.
Life insurance and annuities are designed to pass outside of the estate when a beneficiary is named. They generally bypass probate, the legal process of settling a deceased person’s estate, and go directly to the person or people listed on the policy.
How Does Life Insurance Payout Work?
A life insurance payout, also known as a death benefit, is the amount an insurer pays upon the policyholder’s death. This is usually a lump sum but can sometimes be set up as installment payments or an annuity. The policyholder names one or more beneficiaries, and these individuals or organizations receive the money directly once they file a claim with the insurer.
Insurance companies are not automatically notified when someone passes away. The beneficiary (or sometimes an estate executor) must contact the insurer, provide a death certificate and submit any required claim forms. As long as the policy is valid and there are no unusual circumstances, payouts typically arrive within 30 to 60 days.
Executor’s Role
An executor is appointed in a will (or by a court if there is no will) to manage the estate. Their job includes collecting assets, paying off debts, filing necessary tax returns and distributing any remaining property to heirs. But life insurance is not part of the executor’s job unless no beneficiary is named and the proceeds flow into the estate.
If there is a beneficiary that has been named, the executor cannot redirect the funds or take a percentage as compensation. Their authority extends to probate assets, but not to private contracts like life insurance policies. The insurance company will send the payout to the beneficiary, even if the executor is handling other parts of the estate.
When Does Life Insurance Become Part of the Estate?
There are a few situations where life insurance does go through the estate and the executor becomes involved:
• No beneficiary is named on the policy.
• All named beneficiaries have passed away before the insured.
• The policyholder named their estate as the beneficiary.
In such cases, the death benefit is added to other estate assets, subject to probate and may be used to pay down debts before the remainder is distributed to the heirs according to the will or state law.
Tax & Legal Considerations
Most life insurance payouts are income tax-free for beneficiaries. However, if the proceeds are paid to the estate, they may be counted toward the total estate value and subject to estate tax if the estate is large enough. Certain states have lower thresholds for estate taxes, which may reduce the amount ultimately passed on to heirs.
A trust is a good way to avoid probate and estate taxes. Naming a trust as the beneficiary of a policy can provide more control over how and when the proceeds are distributed and may offer creditor protection.
What Should Beneficiaries Do?
If you are the beneficiary of a life insurance policy, you do not have to wait for probate to finish before filing your claim. You can contact the insurer directly, complete the forms and receive the payout. If an executor or family member tries to claim the funds on your behalf, the insurer will still direct the money to you, unless you authorize otherwise.
Being proactive can make the process smoother. Gather the policy details, request the death certificate promptly and follow up with the insurer if you do not receive the claim paperwork within a few days.