Learn Me: Life Insurance and Death

What do you know about life insurance payouts?

The mother of my kids will be passing soon. We have been divorced for over 20 years now and have no connection other than our kids. While she was healthy, she got a life insurance policy and named them as beneficiary. Over the last year, I'm sure that she has run up a sizable amount of debt and medical expenses.

My guess and hope is that the insurance payout is separate from her estate and free of her encumbrances. What is the normal process and timeline? Can GRM give me some education and guidance that I can pass on to them? As my son jumped in the car last night to drive 10 hours to be with her, he asked what I knew. All I could say was, "I'll look into that." ...so here I am.

In reply to AAZCD :

Insurance passes outside the estate. That is unless the beneficiary of the insurance policy is the estate which people rarely do. So basically whoever the insurance policy beneficiary as is who will receive it. This not have to go through the estate and is not usually available to creditors of the estate.

Payment of insurance policy proceeds is usually Within two weeks or so of presenting the death certificate and proof beneficiary ID.

As someone doing estate planning right now, it all depends upon who the beneficiary is.  It is likely her/your children, but it could also be a trust for them or her estate (as Ovid_and_Flem mentioned).

Thanks, it seems that our son (oldest of the kids) is designated as beneficiary, so it should all be paid to him to be divided at his discretion.

My son (in his early 30s) has a difficult couple weeks ahead as the one who will take on all the responsibilities. I have little experience to guide him.

In the case of my wife's parents and my mother passing all the difficult details were taken care of by others. My mom passed on an 'inherited IRA' which turned out to be a great way to benefit me and my siblings. Every year we receive a 'required minimum distribution', which pretty much covers our Christmas shopping for the kids. This year it will go to help offset their travel expenses and missed work days.

In reply to AAZCD :

It may be different state-by-state, but I remember when my mother died I didn’t have to claim or pay any income tax from her life insurance. 

The net death benefit will go to the primary beneficiary/beneficiaries and does not go through the estate unless the estate or trust is the beneficiary. Keep in mind that the net death benefit may be less than the policy value if a loan is present on the policy. It is possible if she needed cash for medical expenses that she may have borrowed against the cash value in the policy which would result in a loan, which will be paid out of the total death benefit prior to distribution of benefit to the named beneficiaries.

Also remember that debts cannot be passed inherited. Unless they were co-signers on any loans or credit cards, when (and if) creditors and collectors come to call, your kids should tell them to cease and desist or they will be reported to thCFPB in violation of UDAAP.

Any existing debts should settled out of the estate. Anything more than that is not your kids problem. The exceptions to that are if there is something with a note on it that they want, like the car or the house, or if they co-signed on anything. 

In reply to EastCoastMojo :

Spoken like an insurance professional (and well said). Twenty-one years as a claims professional here. 

In reply to conesare2seconds :

Thanks!