Life Insurance Is a Payable on Death Asset That Falls Outside an Estate
When a loved one passes away, sorting through their finances can be overwhelming. For many families, one of the biggest surprises is learning that not all assets are controlled by a will or trust. This is especially true with life insurance policies.
In California, life insurance is considered a “payable on death” (POD) asset. That means the money from the policy is paid directly to the named beneficiary, bypassing probate entirely. While this may seem like a simple and efficient transfer, it can create serious legal and emotional consequences—especially when the policy’s designation conflicts with other parts of an estate plan.
At Trust Law Partners, LLP, our Newport Beach, California, estate planning lawyers represent beneficiaries and heirs in trust and estate disputes. One of the most common triggers for litigation is a life insurance policy that ends up in the hands of someone the decedent may not have intended to benefit. Understanding how life insurance fits into the broader estate picture—and what can go wrong—is essential for avoiding disputes and protecting your rights.
How Life Insurance Works in Estate Planning
When someone buys a life insurance policy, they name one or more beneficiaries to receive the death benefit. This designation is contractual. It doesn’t depend on what the decedent’s will or trust says. As long as the named beneficiary is alive and eligible at the time of death, the insurance company will pay them directly.
This payout does not go through probate. It also does not pass through the decedent’s trust, unless the trust is specifically named as the beneficiary. In the eyes of the law, the life insurance policy is not part of the probate estate. That means the executor or trustee has no control over it, and the funds don’t get divided according to the terms of the will or trust unless they are named explicitly.
This arrangement often makes sense from a planning perspective. It ensures that funds are available quickly, without court involvement. However, it also means that outdated or unexpected beneficiary designations can override more recent estate planning documents, and this is where problems begin.
Common Legal Problems with Life Insurance Beneficiary Designations
We often meet with clients who are shocked to learn that a significant portion of their loved one’s estate has gone to someone completely outside the will or trust. These surprises usually involve life insurance or retirement accounts with beneficiary designations that were never updated.
For example, a man creates a trust leaving everything equally to his three children. But his life insurance policy which was purchased 20 years earlier still names his ex-wife as the sole beneficiary. Unless the designation was revoked or changed in writing, the ex-wife receives the payout, even if she was excluded from the trust or will. The children, despite being the intended beneficiaries of the rest of the estate, have no automatic right to the life insurance proceeds.
These cases are emotionally charged. Heirs feel betrayed. Former spouses or distant relatives may feel entitled. And in many cases, the courts are left to sort through messy facts and unclear intentions.
Can Life Insurance Beneficiary Designations Be Contested?
While beneficiary designations are generally binding, they can be challenged under certain circumstances. At Trust Law Partners, we’ve handled many cases where a beneficiary designation was changed—or left unchanged—under questionable conditions.
Here are some of the legal arguments that may be raised:
- Undue Influence: If someone pressured the policyholder into changing the beneficiary—particularly when the policyholder was elderly, sick, or dependent on the influencer—the designation may be invalid. This is especially common when a caregiver or one child becomes overly involved late in life and ends up being named as the sole beneficiary.
- Lack of Capacity: If the decedent lacked mental capacity when they changed the designation, the change can be challenged. Medical records, witness testimony, and expert evaluations may be used to establish incapacity.
- Forgery or Fraud: If the beneficiary form was forged, altered, or submitted without proper authorization, it may be declared invalid.
- Conflict with Divorce Judgments: In some cases, a divorce decree or court order may have required the decedent to maintain a policy for the benefit of a former spouse or children. If the beneficiary was changed in violation of that order, the rightful party may be able to recover the proceeds.
These disputes often end up in civil or probate court and may involve multiple claimants asserting rights to the same insurance payout.
Life Insurance and Community Property Concerns
California is a community property state, which means that spouses generally share ownership of assets acquired during the marriage. If a life insurance policy was paid for with community funds, even if only one spouse is the named insured, the surviving spouse may have a claim to part of the death benefit.
This often becomes a legal issue when the named beneficiary is someone other than the surviving spouse, such as a child from a prior marriage, a sibling, or a friend. The surviving spouse may argue that their community property interest entitles them to a portion of the proceeds.
Life insurance companies typically pay the full benefit to the listed beneficiary. Any disputes must then be resolved through legal action, often requiring the court to untangle financial records, marital history, and the source of premium payments.
What Happens When There’s No Living Beneficiary?
If all named beneficiaries on a life insurance policy are deceased or disqualified, and no backups are listed, the death benefit becomes payable to the decedent’s estate. In that case, the funds are subject to probate, just like any other estate asset. This can delay the payout and expose the money to creditors.
If the decedent had a trust-based estate plan, the insurance proceeds will not automatically flow into the trust unless the trust was named as the beneficiary. Without that designation, the funds will be distributed under the terms of the will—or by intestate succession if no will exists.
This situation often causes confusion and may result in unequal or unintended distributions, especially in blended families or situations involving stepchildren or estranged relatives.
The Importance of Coordinating Life Insurance with Estate Planning
One of the most effective ways to avoid disputes is to ensure that life insurance policies are updated regularly and coordinated with the rest of the estate plan. This includes:
- Reviewing beneficiary designations after major life events such as marriage, divorce, births, or deaths.
- Naming backup or contingent beneficiaries in case the primary beneficiary cannot receive the funds.
- Considering whether the trust should be the beneficiary, especially if the funds are intended to be distributed in a specific manner.
- Communicating clearly with heirs about how the policy is structured to avoid surprises later.
Estate plans that fail to account for how life insurance proceeds will be distributed are incomplete and in our experience, they are far more likely to result in legal challenges.
How These Cases Turn into Litigation
Disputes over life insurance often arise after the death of the insured, when it’s too late to clarify intentions. Family members may be caught off guard by who was named as the beneficiary or learn that a change was made shortly before death. In some cases, they may not even know the policy exists until after probate has started.
Litigation typically centers around two main issues: whether the beneficiary designation is valid and whether someone else has a legal claim to the proceeds. These cases often involve competing narratives, with one side arguing that the decedent made a knowing, voluntary choice, and the other claiming undue influence or incapacity.
Because life insurance payouts are often significant, ranging from tens of thousands to millions of dollars, these disputes can escalate quickly. They may involve forensic handwriting analysis, depositions, subpoenaed bank records, and extensive witness testimony.
At Trust Law Partners, we represent clients on both sides of these disputes, including:
- Heirs who were excluded from a policy
- Trustees trying to claim insurance proceeds for the benefit of a trust
- Surviving spouses seeking to enforce community property rights
- Individuals defending their right to a payout amid challenges
What to Do If You Suspect Something Is Wrong
If you are a potential beneficiary, or if you are the executor or trustee of an estate, and you discover a life insurance policy that seems suspicious, don’t assume the payout is final. Contact an attorney with experience in estate and trust litigation. You may have a limited time to contest the designation, especially if the insurance company has already begun processing the claim.
It’s also important to gather documents early. Look for the policy itself, beneficiary change forms, emails, letters, and any communication that may support your case. These pieces of evidence are often critical in persuading a judge to freeze or redirect the payout.
How Trust Law Partners Can Help
At Trust Law Partners, LLP, we understand that life insurance is more than just a financial tool, it’s often the largest asset in an estate, and the source of some of the most bitter family disputes.
We focus exclusively on trust and estate litigation, and we have extensive experience in cases involving life insurance disputes, beneficiary challenges, undue influence claims, and enforcement of divorce judgments. Our team knows how to uncover hidden policies, trace financial records, and challenge improper designations when necessary.
If you believe you were wrongly excluded from a life insurance payout, or if you are defending a rightful claim, we can help. Our firm works on a contingency fee basis, so you pay nothing unless we recover money for you.
Call Trust Law Partners, LLP today at 833-853-9305 for a confidential consultation.
