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Life Insurance Proceeds

The distribution of life insurance proceeds after you pass away is typically straightforward, but it depends on how your life insurance policy is structured and the beneficiaries you have designated. As a Folsom lawyer who is experienced in estate planning, I have many clients who have significant sums in life insurance policies that will flow to their family upon their passing.  As such, it is important to understand what happens with life insurance policy proceeds upon an individual’s passing and how it fits into the estate planning process. Here’s what generally happens:

  1. Beneficiary Designations:
    • When you purchase a life insurance policy, you have the option to name one or more beneficiaries. These are the individuals or entities (such as a living trust) who will receive the proceeds from the policy upon your death.
    • You can specify primary beneficiaries and, in some cases, contingent or secondary beneficiaries. Primary beneficiaries have the first claim to the proceeds, while contingent beneficiaries would receive the proceeds if the primary beneficiaries are deceased or cannot be located.
    • It is often times advisable to name a living trust as a beneficiary of life insurance proceeds, as opposed to an individual, because there is always a place for the proceeds to go. For example, if a client lists their child as the primary beneficiary but that child predeceases them, the proceeds will not automatically go to the child’s heirs. Rather, the proceeds will then have to go through the long and expensive probate process. With a properly structured living trust, the proceeds will have somewhere to go and probate will not be necessary. 
  2. Death Notification:
    • Upon your death, the beneficiaries or your executor will need to notify the life insurance company of your passing. They may be required to provide a copy of the death certificate and complete the necessary claim forms provided by the insurance company.
  3. Claim Review and Processing:
    • The insurance company will review the claim to ensure that it is valid and that all necessary documentation has been submitted.
    • If the claim is in order, the insurance company will typically process the claim and prepare to distribute the proceeds.
  4. Payment Options:
    • Beneficiaries usually have several options for receiving the life insurance proceeds:
      • Lump Sum: They can receive the entire amount in one payment.
      • Installments: Some policies offer the option to receive the proceeds in periodic payments over time.
      • Annuity: In some cases, beneficiaries may choose to receive the funds as an annuity, providing a regular stream of income.
  5. Tax Considerations:
    • Life insurance proceeds are typically income tax-free to the beneficiaries. However, there may be estate tax implications if the policy owner’s estate is large enough to trigger estate tax obligations. 
  6. Debts and Claims:
    • Life insurance proceeds generally pass directly to the beneficiaries and are not subject to the probate process. This means they are typically protected from creditors’ claims and do not become part of the deceased person’s estate for the purpose of paying debts.


It’s important to keep your life insurance beneficiary designations up to date to ensure that the proceeds go to the individuals or entities you intend. Life events such as marriage, divorce, or the birth of children may necessitate changes to your beneficiaries. Additionally, it’s advisable for your beneficiaries to be aware of the existence of the policy, know where the policy documents are kept, and have contact information for the insurance company, as this will simplify the claims process when the time comes. If you have any other questions about life insurance proceeds or are seeking the guidance of an experienced Folsom estate planning lawyer, please call Thapar Law at 916-579-0605 or send us a message.

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