What Happens to Life Insurance With No Beneficiary?

When you buy life insurance, you generally designate a beneficiary, which is the person or organization the policy’s death benefit goes to when you die. If a beneficiary isn’t named, it impacts how the proceeds are distributed and can have serious tax implications for the person receiving the payout. In this article, we’ll explore what happens to life insurance when no beneficiary is named.

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Who Does Life Insurance Go to If There’s No Beneficiary?

If a life insurance policy has no beneficiary and the covered individual dies, the death benefit is typically paid out to the estate of the deceased. The estate consists of the sum of that person’s belongings, including investments and any property they owned. What happens to the assets in the estate is then determined by a combination of factors, such as the existence of a will, any outstanding debts and the deceased's state of residence. 

What Happens to Life Insurance Proceeds After They’re Paid to an Estate?

Life insurance proceeds that are paid to an estate become part of the estate’s assets, which are distributed according to the deceased’s will, if one exists. If there’s no will or if the will is unclear, invalid or contested, the estate may go into probate, which is a legal proceeding that oversees the distribution of an estate to the rightful heirs.

The Probate Process

When a will exists, the probate process may include the following steps.

1. Authentication of the will
2. Approval of the executor
3. Location of the assets
4. Assessment of the total value of assets
5. Payment of taxes and other debts
6. Distribution of the remaining assets according to the will

Under normal circumstances, the probate process may take a year or longer. If a will is contested, the process may be significantly delayed while the case is litigated.

If the deceased hasn’t left a will, the courts typically make all the decisions and will assign a representative to function as the estate’s executor. In cases where no will exists and no living relatives are found, an estate’s assets default to the state of residence.

The Downside to Life Insurance With No Beneficiary

If a loved one's life insurance policy has no designated beneficiary but you’ve been named as a beneficiary in that person's will, you'll likely still get paid. However, the amount you receive may be significantly diminished due to tax implications and debt payoffs.

Typically, when you receive a death benefit payout from a life insurance policy, the money doesn’t have to be included in your gross income, so it isn’t taxable. It’s also earmarked for the legal beneficiaries and can’t be accessed by creditors. As long as the premiums have been paid up, beneficiaries always receive the full contractual amount of the death benefit.

However, once the proceeds of a life insurance policy are turned over to the deceased's estate, the death benefit is taxable by federal and state governments, which can significantly cut into the amount you’ll receive. The assets in an estate are also used to pay down any remaining debts of the deceased prior to distribution to heirs, which means you may receive a much smaller amount than what you would have gotten if the funds had been paid out directly from the life insurance company. In some cases, no benefits remain after taxes and debt payoff, leaving beneficiaries without the financial protection intended by their deceased loved one.

Other Reasons Why a Policy Might Not Have a Valid Beneficiary

In addition to simply not naming someone to receive the death benefit, there are several other reasons a life insurance policy may not have a valid beneficiary.

• The beneficiary died. If a policyholder names a sole beneficiary and that individual dies before the deceased does, the policy will have no valid beneficiary until a new designee is named.
• The policyholder named a pet as the sole beneficiary. Although your pets may rely on you for financial support, they aren’t considered valid beneficiaries on a life insurance policy. Instead, you can ensure their welfare by setting up a trust or designating a legal guardian or caretaker to receive the death benefit on their behalf.
• A beneficiary was named fraudulently or under undue influence. If changes to a policy's beneficiaries were made because of threats or without the policyholder’s consent, the beneficiary may not be valid under the law. This can happen in instances when power of attorney is involved.
• The policyholder lacked the mental capacity to make changes. If the policyholder doesn't have the mental capacity to make an informed decision, changes to the plan's named beneficiaries may be considered invalid.

Who Inherits If the Beneficiary Has Died?

If the main beneficiary on a policy has died, several outcomes are possible, depending on when the death of the beneficiary occurred.

• If the beneficiary was alive when the insured individual died and passed away prior to receiving the death benefit, the proceeds become part of the beneficiary’s estate.
• If the beneficiary died prior to the insured individual and the policy includes a contingent beneficiary, the death benefit is paid to the contingent beneficiary.
• If the beneficiary died prior to the insured individual but no contingent beneficiary has been named in the policy, the death benefit defaults to the estate of the insured.
• If the main beneficiary died prior to the insured individual and the policy names multiple contingent beneficiaries, the proceeds are split among the remaining beneficiaries.
• If the policy designates multiple primary beneficiaries and one individual dies, the policy’s proceeds are split among the remaining beneficiaries upon the insured’s death.
• If it’s impossible to determine whether the insured or their beneficiary died first, such as when both died together in a car accident, the death benefit is paid to the contingent beneficiary or to the insured’s estate if no secondary beneficiary is designated.

Beneficiary Disputes

When no beneficiary is named in a life insurance policy or the designated beneficiary may be deemed invalid, it can lead to disputes among potential claimants. Family members, friends and creditors may attempt to file claims for the death benefit even if they haven't been named in the formal policy documents.