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If after someone dies, you receive life insurance as the beneficiary, is the estate entitled to any of that money? Are there cases where the life insurance money can be included in the estate and therefore be required for repayment of debts of the deceased?

I am interested in the case of a bankrupt estate. The estate owes $100K and the life insurance, payable to a named beneficiary outside of the estate, is $10K. Is the estate's creditors entitled to the $10K insurance?

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    This may depend on whether the policy is payable to one or more individuals or to the estate for division from there. I've seen folks set it up both ways....
    – keshlam
    Commented Jul 11, 2016 at 16:41
  • @keshlam I was asking as an individual and meant to convey that by saying "you receive life insurance as the beneficiary."
    – Alex B
    Commented Jul 15, 2016 at 22:03
  • If you are clearly the beneficiary, and the policy is clearly legitimate, and there is no evidence of fraud or other foul play, then the money is yours except for that portion that goes to taxes. At least until the lawyers start arguing about it.
    – keshlam
    Commented Jul 15, 2016 at 22:07

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Life insurance is not required to be used to pay the debts of the estate.

Life insurance proceeds are not part of your estate. They go directly to the beneficiary, and are their property. Your daughter can do whatever she wants with the proceeds.

She can pay off your credit cards if she wants, but she doesn’t have to, even if your will said she should use the insurance money to pay your debts. If that’s what you really want, you should make your estate—not your daughter—the beneficiary of your insurance policies. Then, the proceeds will become part of your estate, so they’d be available to repay your debts.

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... if the deceased owned life insurance and nominated a beneficiary of the policy, the proceeds of that policy would not pass into the deceased's estate, but would go directly to the nominated beneficiary

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The amount of the life insurance is included in the estate for the purpose of calculating estate tax, but not for the purpose of debt repayment.

The estate for the purpose of estate tax is called the "Gross estate" and includes many things that are not included in a "probate" estate.

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  • That last part about "Gross estate" is surprising (though understandable now that I think about it).
    – RonJohn
    Commented Oct 9, 2019 at 0:31
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Yes. If the deceased owned the policy, the proceeds are considered part of the estate. In the specific case where the estate is worth (this year 2011) more than $5M, there may be estate taxes due and the insurance would be prorated to pay its portion of that estate tax bill.

Keep in mind, the estate tax itself is subject to change. I recall when it was a simple $1M exemption, and if I had a $1M policy and just say $100K in assets, there would have been tax due on the $100K. In general, if there's any concern that one's estate would have the potential to owe estate tax, it's best to have the insurance owned by the beneficiary and gift them the premium cost each year.

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  • I did not think that the insurance payout was part of the sum included when calculating inheritence tax. Say you have a family farm with 3 million and you have 3 million in debt and a 3 million life insureance policy does that mean that your inheritance is considered 6 million for tax purposes?
    – user4127
    Commented Aug 19, 2011 at 20:17
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    It sure is. For estate tax, it's the net value, a $1M house with a $1M mortgage is $0 for tax purposes. There's a whole specialty out there with trusts and attorneys skilled in the laws to help avoid these kinds of issues. Unfortunately, the laws keep changing, so you can't count on the $5M exemption being around indefinitely.
    – JTP - Apologise to Monica ♦
    Commented Aug 19, 2011 at 20:42
  • The estate is bankrupt. Fictionally, the estate owes $100K and the life insurance is $10K. Is the $10K obligated to pay creditors?
    – Alex B
    Commented Aug 19, 2011 at 20:44
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    @Chad Looking on the internet, I see lots of links like this: bills.com/insurance-beneficiary that describe that the benefits are out of reach from creditors. Do you have contrary evidence? I'd love to hear it.
    – Alex B
    Commented Aug 19, 2011 at 20:56
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    @Joe I think that life insurance is not obligated to pay debts. The Wikipedia article on estate taxes makes a distinction between the gross estate used for estate tax and the probate estate used for settling affairs. Anecdotal evidence that it is not obligated to pay debts is that I haven't found a story on line of someone being forced to pay debts from life insurance.
    – Alex B
    Commented Aug 20, 2011 at 17:13

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