What happens to the proceeds of a life insurance policy if the beneficiary is deceased?

Occasionally, a life insurance policy will mature only for the insurance company to discover that the named beneficiary on the policy has already passed away. When this happens, the policy will either pay to the remaining, secondary beneficiaries, or go to the estate of the deceased. The major factor will be how your policy is worded, and the best method is often to place the proceeds into a trust fund that is distributed over time to the desired recipients.

In addition to having multiple beneficiaries on your life insurance policy, there is a type of beneficiary called a contingent beneficiary. A contingent beneficiary only collects the proceeds if the primary beneficiary is deceased or is otherwise unable to collect the proceeds. When you die, the primary beneficiary is the first payee, and will receive the full amount listed, and the contingent is only involved if the primary is not available.

You can also specify multiple payees for your life insurance policy, or place it into a trust fund. In the first case, the proceeds will be divided among beneficiaries as specified in the policy, allowing you to leave portions of the proceeds to several different people. In the second case, the proceeds are placed into a trust fund similar to a savings account, and the proceeds are then paid out according to the dictates of the policy.

In the event that you do not have a contingent, multiple beneficiaries and you have not specified a trust fund or other account, then the life insurance policy pays directly to your estate and will be administered by the executor of your estate. This method is less preferable than a trust fund, though, because any money bequeathed to your estate will be taxed when the estate is settled, causing your desired beneficiaries to lose a large portion of the money to taxation.