Inheriting Life Insurance: Your Complete Guide to Navigating Life Insurance Inheritances (2024) (2024)

Life insurance inheritance refers to a beneficiary’s receipt of death benefits following the insured person’s passing. The payment can be used to cover funeral costs, pay off debts, provide financial security for loved ones and cover final expenses, including burial costs, federal estate taxes and other inheritance taxes.

The policyholder typically names beneficiaries when purchasing a life insurance policy. The policy’s beneficiaries are typically spouses, children and other individuals who would suffer a financial loss following the insured person’s death. This is called a named beneficiary.

You can also designate an estate or trust as the beneficiary. In this case, the proceeds of the policy would be paid to the estate or trust and then distributed according to instructions in a will or trust document.

The process for receiving life insurance proceeds depends on whether you are a named beneficiary or will inherit through the estate. If you are a named beneficiary, you typically only need to provide the insured person’s proof of death and proof that you are the intended recipient of the benefits. Often, you’re submitting a certified copy of the death certificate and a copy of the policy. If the inheritance is paid through a trust, the trustee is responsible for disbursing funds according to the direction of the trust documents.

At the time of an insured person’s death, you might not be aware of all the policies they held. It may be necessary to search for all policies that were held by the deceased and any written estate plans, such as a life insurance trust or will. The executor or administrator of the estate is responsible for collecting information on all insurance policies and filing claim forms with the insurer.

To claim an inheritance, a life insurance beneficiary must typically provide proof of death and proof that they are the intended recipient of the benefits. If there is a dispute over who should receive proceeds from a life insurance policy, it may be necessary to go through probate court for resolution. This process can take several months or even years, depending on its complexity.

When inheriting life insurance through an estate, the estate is generally responsible for paying federal taxes associated with the inheritance, including federal estate and gift tax and generation-skipping transfer tax. Many states impose inheritance and estate taxes, too. Also keep in mind that life insurance payouts made to certain types of trusts may be excluded from a deceased person’s taxable estate.

Don’t assume as a beneficiary that your inheritance is tax-free. Still, beneficiaries are subject to tax on earnings from their inheritance. As such, beneficiaries should always consult with an income tax professional in order to ensure that all paperwork is filed correctly with the IRS and state tax authorities and that any taxes owed are paid in full and in a timely manner.

Life insurance proceeds can be distributed in one of a few ways. Beneficiaries can opt to receive a lump-sum payout, which can be used for a variety of purposes, such as paying off debts or providing financial security for loved ones.

Beneficiaries may also opt to establish an annuity, which provides installment payments over several years to help ensure that the beneficiary’s funds are managed properly. This option is especially helpful if the beneficiary needs to manage their money over a longer period and doesn’t want to be burdened with large expenses right away.

For minors and beneficiaries with special needs, there are additional considerations that should be taken into account. It is important to seek advice from a financial advisor or legal expert to ensure that all paperwork is filled out correctly and that funds are distributed in accordance with any state laws or trust documents.

The best life insurance is the kind that gets inherited efficiently and without dispute.

A lot can go wrong with an inheritance from life insurance if the proper legal and administrative work has not been done in advance. Here are some of the most common challenges beneficiaries will face.

Contesting a Life Insurance Claim

To contest a life insurance claim, in most cases, the beneficiary must provide proof that the policy owner was the legal owner of the life policy and that they are the rightful beneficiary. Any potential disputes must also be resolved before a payout can occur, which can involve long court proceedings and negotiations with insurers or other claimants.

If there is disagreement among claimants, it may be necessary to go through probate court for resolution, which can be a long and expensive process. It can also be emotionally difficult for those involved. It is important to seek advice from a legal expert when dealing with these types of matters in order to ensure that all parties receive their fair share of the inheritance.

Dealing With Multiple Beneficiaries and Conflicting Interests

There may be multiple beneficiaries involved in a life insurance payout. This can present challenges, as each beneficiary may have different interests or expectations when it comes to who receives what part of the inheritance. In some cases, there could be a disagreement among beneficiaries over who should receive which assets, which can lead to conflict and confusion. It is important to establish clear communication between all parties to ensure everyone has their needs met and that disputes are avoided.

There are also potential legal and tax implications when dealing with multiple beneficiaries. If the life insurance policy is owned by a trust, then the trust language can typically resolve most legal issues, but the emotions and conflict may still exist.

If the life insurance death benefit goes directly to named beneficiaries, it is still possible for someone to challenge the amount of death benefit received. When dealing with multiple beneficiaries, especially when they are family members, it’s advisable to have regular communication before the death of the insured. Then, when the payout occurs, you have some common ground from which to continue the conversation. Beneficiaries should consult with a financial advisor or tax professional in order to make sure that all paperwork is filed correctly and that taxes are paid in full in a timely manner.

Resolving Disputes or Disagreements

It is important to establish clear communication between all parties to ensure everyone’s needs are met with the goal of avoiding costly disputes.

If a dispute does arise, the first step is usually for the parties to discuss their differences and attempt to reach an agreement on how money should be divided. If this does not work, then it may be necessary for one party to seek legal advice or arbitration from a qualified attorney or mediator. In extreme cases, probate court may be the only way to resolve a dispute.

Also, any legal proceedings related to an inheritance can be costly and time consuming. With any dispute, it’s important to act quickly in order to prevent any further delays or complications with receiving payment from the life insurance policy. Seeking advice from a financial advisor or lawyer can help ensure that everything is handled smoothly and efficiently.

One of the most important strategies for policyholders to optimize life insurance inheritances is to review their beneficiaries and policy details regularly. Policyholders should ensure that all information about the beneficiaries is up to date, including contact information and any changes in circ*mstances. It is equally important to have regular communication with your beneficiaries to help remove or reduce potential conflicts after death.

Estate planning is also a powerful tool to clear up ambiguities. This includes creating a trust document or will that spells out how assets should be divided upon death and any end-of-life wishes. Estate planning can help reduce potential legal disputes among family members and makes it easier for assets to be distributed in accordance with the wishes of the deceased. It can also provide tax advantages by allowing some of the proceeds from life insurance policies to bypass probate court and go directly to named beneficiaries.

Inheriting a life insurance policy means that someone thought highly enough of you to pay monthly or annual premiums to help you plan for your financial security. The process of inheriting money can sometimes be lengthy and complicated, and it’s sometimes made even more difficult when multiple beneficiaries are involved.

It is important to understand the legal and tax implications of life insurance inheritance and the potential disputes that arise among beneficiaries. When dealing with multiple beneficiaries, have regular communication before the death of the insured in order to establish common ground.

It’s also important to engage in estate planning early on so that assets are distributed according to the wishes of the deceased. This includes creating a trust document or will, discussing end-of-life wishes with family members and drafting necessary documents, such as power of attorney forms.

Additionally, it is essential to review beneficiaries and policy details regularly with an insurance agent or financial professional and seek professional advice when disputes arise in order to ensure fair compensation for all parties involved.

Our team researches and ranks life insurance companies using an in-depth scoring system that considers the factors most important to consumers like you. Our analysis includes a comprehensive review of each provider we feature based on available coverage, customizability, availability, customer service and company reputation. Here are the factors we take into consideration when rating life insurance providers:

• Brand trust (40%): Life insurance payouts can exceed $100,000 or more, which makes choosing a reputable and trustworthy installer important. To assess brand trust, we use J.D. Power and Associates customer satisfaction surveys, AM Best credit rating scores and the National Association of Insurance Commissioners (NAIC) complaint index. The higher a company scores in each area, the more points it receives.
• Coverage (33%): The more policy options a life insurance company offers, the more opportunities you have to obtain the right coverage for your specific needs. For this reason, we give companies the most points for offering multiple types of life insurance, including various term, permanent and no-exam options.
• Availability and ease of use (19%): Since life insurance coverage options can be complex, we consider the ways a customer can reach a company — and how easy communication is. For this category, we research how many communication channels a company offers for general customer support, claims processing and the application process. Companies earn the most points for offering various ways to interact with an agent, both in-person and online.
• Riders (8%): Companies offering various life insurance riders or endorsem*nts allow policyholders to better customize their coverage. In this category, we determine how many riders a company offers and award the most points to providers with more than 10 options.

We use our rating system to compare and contrast each company against key factors to help us determine the best life insurance companies in the industry. To learn more, read ourfull life insurance methodologyfor reviewing and scoring providers.AM Best Disclaimer

Scott Karstens is an accomplished insurance and financial services veteran, having worked inthe industry since 2001. He is currently the President of NFG Brokerage, but he is becoming best known as the Founder and CEO of both Broker Backoffice and his new direct-to-consumer insurance platform called Quote Bot, which offers user-friendly solutions for life insurance planning.

Ryan Lasker is a financial writer and editor with bylines in Morning Brew, The Motley Fool, and several more. As a certified public accountant, he leverages his technical expertise in personal finance and tax to fuel his passion for teaching financial literacy. When he’s not writing, editing or working in a spreadsheet, he’s biking the D.C. trails or reading.