What happens to a policy if a person that has a policy out on a person and the policy holder passes away?

If a policyholder dies, the designated beneficiary(ies) is entitled to the proceeds. The beneficiary will be named, and an address shown, on the policy. However, if the insured has not updated the address of the beneficiary (if he/she has moved), the insurer may have difficulty finding him/her to pay. Many states require, though, that insurers make a diligent effort to locate beneficiaries for payment of policy proceeds, but just how "diligent" the effort will be is often up for grabs.

If the insurer received proper notice of the insured's death, and a proper proof of claim by someone authorized to file one, and further assuming that the policy was in force at the time of the insured's death, the insurer would pay proceeds to the contingent (secondary) beneficiary if one was named. If one was not named, but if an estate was opened for the insured, proceeds would likely be paid to the estate. If that happens, the proceeds would pass according to the Will, if there was one, or according to the laws of descent and distribution of the state where the insured died.

If the policy was a whole life policy that had accumulated cash value, the cash value may carry the policy for a period of time without payment of premium (the cash value would be debited for the ongoing premium until the cash value is exhausted). At that point, the policy would lapse. If the policy was a term life policy, generally, within a month or so of no premiums being made, the policy would lapse and would be of no further value.