Thoughts: Coordinating Life Insurance with Your Estate Plan

Life insurance can be an important component in a well rounded estate plan, but owners of life insurance should consider revisiting their life insurance policies to coordinate beneficiary designation forms with their estate planning documents, such as a last will and testament. In doing so, you may be able to give more to your beneficiaries than just the value of the policy’s death benefits.

Life insurance can be intended for different purposes. For instance, life insurance can be used to leave behind or supplement an inheritance. It can also provide a mechanism for the payment of expenses upon the death of the insured and can be used to leverage wealth and assist in mitigating estate taxes. During the life of the owner, some life insurance policies provide protection against disability or long-term care by earning a cash surrender value that may be used to fund long-term care expenses. Many people purchase pre-need funeral contracts funded with life insurance policies which allow for the immediate payment of funeral expenses and relieve the family of the burden of covering the costs of burial.

While many people have life insurance through their employer or have purchased a policy from an insurance broker, most people are unaware that the persons designated as beneficiaries of the policy may be missing out on other indirect benefits. Your estate’s assets can be divided into two broad categories: probate assets and non-probate assets. Probate assets include real estate and personal property – as well as bank accounts – that do not have a beneficiary designation. Non-probate assets are those that pass pursuant to a right of survivorship agreement, pay on death designation or beneficiary designation, such as life insurance for which beneficiaries have been named. Probate assets will pass according to the terms of your will; however, nonprobate assets will pass according to the beneficiary designation. In other words, the beneficiary designation form for your life insurance policy trumps the terms of your will.

In some instances, it is advisable to have your life insurance pass outside of your will to avoid probate or mitigate estate taxes. However, there may be very good and well-intentioned reasons why you would want your life insurance to be governed by your will. For example, you may have created a trust minor children or a family member with special needs and to properly fund these trusts. In order to avoid a costly guardianship or the potential ineligibility for public benefits, the life insurance death benefits must pass through your will and not directly to these individuals through a beneficiary designation.

In order to ensure that your will-based estate plan is followed, it is necessary to coordinate life insurance policies that you currently own – or may own in the future – with your estate plan. Each financial institution has a different procedure for changing beneficiary designations, and you may have to contact financial institutions to obtain a specific form to change beneficiary designations. You will need to make sure you properly word the beneficiary designation. It may be more complicated than simply inserting the name of an individual. Consider visiting with your estate planning attorney before making any changes to your beneficiary designations to make sure your wishes will be accomplished through your life insurance and your estate planning documents.

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