Life insurance policies are intended to pay out a sum to a beneficiary when an individual dies. But not all life insurance policies have a beneficiary -- so what happens to the policy? This can be complicated to answer depending on the situation.
Why Would a Life Insurance Policy Be Without a Beneficiary?
Sometimes individuals simply fail to update their insurance policies. Though they may have gotten married or had a child, they might not have updated their paperwork since they were single -- consequently there's no listed heir. Individuals can also potentially have life insurance policies that they don't even know about. Small life insurance policies can be attached to employment, retirement accounts, and even credit cards. In this case, the individual may have never filled out the paperwork.
What Happens When a Life Insurance Policy Doesn't Have One?
When there isn't a beneficiary, a life insurance policy will pay out to an individual's estate. An individual's estate is comprised of all their assets and debts. The policy will then be used to pay off any debts that the individual has (which can include their last expenses), and then any of those assets are going to be distributed per the estate. An estate is generally distributed to the individual's next heirs -- their closest family members. A life insurance policy may also need to be notified to pay out, or the death can be overlooked -- so family members and friends need to be conscientious.
What If the Estate Has No Heirs?
If life insurance is paid out to the estate and the estate has no heirs, then the estate will often end up going to the government instead. However, heirs will usually move towards any living family members, which can go back quite far.
What If the Estate's Debts Exceed the Payout?
One of the reasons it's so important to name a beneficiary is because a beneficiary will automatically gain the value of the life insurance policy. If the life insurance policy is paid out to the estate, then the debts of that estate need to be paid before an heir can acquire any of the life insurance money.
A life insurance policy is part of a comprehensive estate management plan. A life insurance expert can help an individual set up their insurance policy properly, so that their heirs get what they deserve and that there isn't any associated red tape. For more information, contact a business such as Crummey Service.