Life insurance can be a very valuable tool within your broader estate planning strategy. It can provide financial support to your beneficiaries after your death – helping to cover funeral costs and pay down debts, for instance – or it can “simply” provide them with financial assets to use as they see fit. It may be one of the most valuable assets that you leave to your family.
While life insurance can be an important component of your estate plan, it doesn’t necessarily need to be addressed within the estate plan documentation that you prepare with the assistance of an attorney. That’s not where you decide how the money will be distributed, at least in the majority of cases. Life insurance policies are generally distributed according to beneficiary designations alone.
The beneficiary designation
Proper beneficiary designations are vital to ensure that the life insurance proceeds go to intended recipients and avoid probate. You should choose a beneficiary when you initially set up your plan. The insurance company can pay this beneficiary directly when you have passed away. Beneficiary designations generally override instructions in a will. If you want to change how the money will be distributed, then you need to change your designations.
For example, say that you had two children when you decided to buy a life insurance policy. You named them both as beneficiaries and said that they should split the money. But then you had another child, and you simply added into your will that the first two siblings need to share their life insurance with the third. Those two older siblings would have the option to do this if they wanted to, but they wouldn’t be legally obligated to do so because the insurance company is still only going to send the money to the two individuals who are named in the policy.
Your legal options
Remember that your will only governs your estate. Before the policy is paid out, it is not part of your estate. To better ensure that your life insurance policies are integrated effectively into your estate plan, take the time to carefully consider all of your legal options. You may need to consider tax implications, choose appropriate ownership structures and make beneficiary designations that align with your broader estate planning objectives as you move forward.