How Life Insurance Works
Distribution and Moving Assets
The process of passing assets from the deceased to the beneficiary is incredibly important when investing in life insurance and sorting through inheritance. AARP Life Insurance works by passing the deceased person’s assets through probate or outside probate. Probate is the process of estate administration typically overseen by probate court. If someone dies with a will, the probate court ensures that the assets are distributed according to the terms of the will. If the deceased left no will, the court will supervise the distribution of probate assets following the law of descent and distribution, thus determining who is entitled to the property through rules of inheritance.
Certain types of property may pass outside of probate, and not have to go through the same court process. Most retirement accounts, insurance policies, annuities, some investments registered as transfer on death, property owned by a trust, and property owned as joint tenants with rights of survivorship may be regarded in a way that will allow them to be exempt from the probate process. Instead, this property could pass directly to the designated beneficiary without any court supervision.
Assets that pass through court before they are distributed are typically held in the deceased owner’s name only and have no provision for automatic succession of ownership upon the owner’s death. In many states, even the assets that may normally avoid probate could become a probate asset if it is kept as community property or tenants in common. Stocks, real estate, bonds, and personal property are often probated unless the owner places them in a trust prior to death.
A person’s will, or the state’s intestacy law if there is no will, delineates how and to whom the estate’s assets will be divided after their death has occurred. This document decides upon the executor, the individual placed in charge of settling and distributing the estate, determines guardianship of any children under age 18, and establishes when and how the assets will be given to those receiving them.
Each state has varying regulations in regards to estate settlement, though there are settlement options that differ based on the estate’s overall value. Estates that are smaller can usually be settled more informally, and larger ones tend to need the will validated by the state’s probate court.
Accounts registered as transfer on death, insurance policies, and retirement accounts that have designated a beneficiary other than the estate are typically able to pass outside probate. Such assets also include investment accounts with designations of joint ownership with rights to survivorship and tenants by entirety.