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Life insurance is a popular method people use to protect their loved ones in the future. The proceeds from these policies can be used for final arrangements, to cover medical bills or to help with ongoing expenses after a wage-earning passes away. But it's important to understand how life insurance relates to your estate.

Is Life Insurance Part of an Estate After Death?

Monetary and other benefits from a life insurance policy are typically not part of the policyholder’s estate. They are not assets that were held or controlled by that person. The life insurance policy can also pass to the designated beneficiaries without a will or probate. 

However, there are situations where the insurance benefits can become part of the estate. This happens when either the policy is payable to the estate or if the named beneficiary dies before the policyholder. In these cases, life insurance is considered an estate asset, like any other property. 

What Is Considered an Estate After Death?

The sum of a person's wealth is their estate. Everything you own, including real estate, cars, cash and even baseball cards, are technically part of your estate.

The part of the estate that passes on to your heirs is similar to your net worth. It’s everything you have minus everything you owe—or your assets minus your liabilities—when you die. This is called net estate.

Things that come out of your estate include debts such as credit card balances, mortgages and car loans. Medical bills might need to be settled by the estate as well as funeral costs and other burial expenses.

Who Receives Life Insurance If the Beneficiary Has Died?

If your primary beneficiary dies before you do, the life insurance payout goes to the secondary beneficiary if you listed one. Otherwise, it becomes part of your estate. You can stop this from happening by keeping up with life insurance records and updating beneficiaries as necessary.

Another possible circumstance is that the beneficiary dies after you but before they claim the life insurance. In this situation, the life insurance benefit is almost always paid to the primary beneficiary's estate. If the life insurance benefit becomes part of an estate, it may be claimed by debtors.

Are Life Insurance Proceeds Protected from Creditors?

Life insurance benefits paid to a beneficiary generally cannot be taken by creditors. This is to ensure families can use the proceeds to help with the financial burden of losing a loved one.  If the benefits are paid to an estate, they may be subject to creditors. Another exception is when the beneficiary owes money. Creditors may be able to claim that money from the beneficiary depending on the regulations where they live.

If you're trying to set up protections for your loved ones with life insurance and other estate planning, it may be a good idea to speak to a lawyer experienced in these matters. Estates can become complex and the laws are specific to each state.

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