Why Life Insurance Isn’t an Estate Plan
Many people think that once they have a life insurance policy they are all set. They think that everything is taken care of if they die because they have life insurance.
It’s true. Your life insurance can replace your income if you pass away. But what you may not realize is that your family can still end up stuck in court or financially stuck without an overarching estate plan to guide what happens next.
Why people conflate life insurance with estate planning
Oftentimes, people consider life insurance and estate planning to be one and the same. The reason for this is that most people think that estate planning merely takes care of your loved ones after you pass—much like life insurance is supposed to do. But the truth of the matter is that life insurance is not estate planning. It is a tool that makes your estate planning, in many cases, more robust and effective. But it is just a piece of the puzzle.
What is life insurance?
Life insurance is an insurance policy that you pay for. With the payment of that policy you are asking the life insurance company to pay out a designated sum to your loved ones should you die.
There are whole life policies and term life policies, and both are designed to do different things.
A whole life policy pays out money to your beneficiaries no matter what age you die. This policy may allow for your beneficiaries to receive a lower amount as the years progress. Meaning, your loved ones would receive a larger disbursement if you died at 30, rather than 90. But every whole life policy is different. Oftentimes, whole life insurance policies cost significantly more than term.
Term life insurance policies cover you for a specific term. Perhaps you select a 20 year term. That means, if you die during that 20 year term, provided you have kept up with your premium payments, your loved ones will receive the amount you designated upon purchasing the policy.
It’s important to note that all life insurance policies have safeguards in place and every policy is different. It’s important to work closely with a financial advisor to help you ascertain which type of policy is best for you to purchase
What does life insurance do?
Life insurance creates a safety net for your loved ones. Most people buy a life insurance policy that will replace their income and cover their debts. This means in the wake of a loved one’s death, the family isn’t also strapped with trying to stay above water financially.
And life insurance can pass to your designated beneficiaries without the need for probate– meaning your loved ones wouldn’t need to go to court to get access to these funds.
What it does life insurance not do?
Life insurance cannot designate a guardian for your minor children. It cannot give a loved one agency to act as your power of attorney for financial or medical decisions. And it cannot map out a plan for how to use the funds it disburses.
What is estate planning?
Estate planning is the culmination of many tools to provide you and your loved ones with a roadmap for how your assets are to be distributed and how your loved ones are to be cared for.
Estate planning also includes documents that are used during your lifetime. These documents can include:
- A Trust, which is a roadmap for how your assets are handled both during and after your life.
- A Will, which allows you to name guardians for minor or disabled children (or loved ones) under your care.
- Power of attorney documents for both financial and medical decisions
Estate planning is made better when combined with great tools like life insurance! You can name your Trust as the beneficiary of your life insurance policy, and then those funds can be distributed as your Trust maps out.
When should life insurance flow through a trust?
Sometimes the simplest thing is the best: your loved ones are named in your beneficiary designation– and they get the funds outright.
But in a lot of cases outright distribution isn’t right. Maybe your beneficiary is a minor. You would want that money to be put into an established Trust for them. Or perhaps a beneficiary wouldn’t do well handling a large sum of money all at once. Again, putting the money into a Trust that has clear instructions on what to do with the money could be the wisest choice.
Conclusion
Life insurance provides a financial safety net for your loved ones, but estate planning determines what happens to your assets and gives you loved ones a plan for moving forward after your death. Call us at (404) 736-6066 or visit our website to schedule a consultation to discuss how we can help you create an estate plan that seamlessly incorporates your life insurance policy and your wishes!
FAQs
Do I need a Will if I have life insurance?
Yes. You need a Will (and probably a Trust) to determine what happens to all of your assets after your death—not just your life insurance policy. Also, a Will is the only document you can use to name a guardian for minor children.
Can I name my minor children as beneficiaries on my life insurance policy?
This is a tricky one. Because technically you can, but you have to have a Trust established for the money to flow through, since the child is a minor. So, while it’s possible, there are much better ways to accomplish the same goal: making sure your children benefit from your life insurance policy.
Does life insurance avoid probate?
Yes. If you have it flow directly to a living, sound minded, adult beneficiary, OR if you name a Trust as the beneficiary of the life insurance policy. Our office would love to help you determine what the best course of action is for you and your loved ones.
What else do I need besides life insurance?
You need an estate plan! Every estate and family is different, so it’s important to work closely with a skilled estate planning attorney, like me, to help you determine exactly what you need to protect your family and your estate.
Should I get life insurance or a will?
You probably need both. The truth is not everyone needs life insurance, but everyone needs a Will.
Learn more: Download Peace of Mind Through Estate Planning eBook.