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?
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.
... 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
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.
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.
