Part of protecting those you care for when you die is making sure that a proper estate plan is in place. While having a plan is essential, no estate plan can carry out your wishes without the right amount of money available to fund your goals. Life insurance is an option that helps many people provide for their loved ones in the way they envision.
Who can benefit from life insurance?
Many different types of people can benefit from having adequate life insurance coverage. Here are a few of the most common groups:
If you own a business and want to leave it to some but not all of your children, a life insurance policy can provide cash to the children who are not receiving an interest in the business, equalizing the value of each child's inheritance. A surviving business partner can also use life insurance proceeds to buy the deceased partner's interest from their family. That way, the deceased partner's loved ones get the money without the surviving partner having to spend money from the business or their own pocket, and the business can continue uninterrupted.
Parents with young children
A life insurance policy can help pay for the expenses of raising children after their parents are deceased, reducing their guardian's financial burden. Life insurance can also provide for a surviving parent if the deceased parent was the family's primary source of income.
Anyone caring for a disabled family member
A life insurance policy can provide money for continuing care for family members with long-term disabling health conditions. However, if they are currently receiving or eligible for government assistance, you must exercise additional caution when providing them with funds from life insurance so the family member is not disqualified from receiving those benefits.
Charitably inclined individuals
A life insurance policy is an effective way to fund your charitable endeavors without taking away from other accounts or property that you may want to leave to your loved ones. Life insurance can enable you to leave a larger gift to the charity at your death than you would have if you had been making lifetime contributions.
People facing a large estate tax bill at death
If the value of all of your accounts and property is more than the lifetime exclusion amount at your death, estate tax may be due. Life insurance can provide your loved ones with cash to pay the tax. This cash can be extremely helpful if your accounts or property would be difficult to cash in or sell to pay the tax.
Importance of the Beneficiary Designation
If you have a life insurance policy, it is crucial that you complete the beneficiary designation in a way that matches your overall wishes. Below are some examples of what results when you list certain classes of beneficiaries.
No beneficiary.If you do not fill out the beneficiary designation before you die, the death benefit will be distributed according to the policy agreement's default rules, which may give the proceeds to your spouse or heirs, as defined by the plan agreement or applicable state law, or to your estate, which will require your loved ones to go through the costly, time-consuming, and public probate process.
A minor as beneficiary.Depending on your family situation, you may be inclined to leave the money from a life insurance policy to your minor child or grandchild. However, because a minor cannot legally own or control their money, a court would have to select someone to hold the money on the minor's behalf until they reach the age of majority (eighteen or twenty-one, depending on your state). At that time, the money would be turned over in full to the beneficiary, who would be able to spend it however they choose with no protections.
An adult as beneficiary. While an adult can receive the money from the life insurance policy immediately, this solution may still not be ideal. After the beneficiary receives the money, they can spend it on whatever they choose; it could also be taken by a divorcing spouse or become subject to collection for an outstanding debt or judgment. Depending on the individual, the money may not last long.
A trust as beneficiary. This option allows the money from the life insurance to be paid to the trustee of the trust along with instructions for how and for whom the trustee is to use the money. Additional provisions can be added to the trust to increase protections against creditors, divorcing spouses, and predators, and to ensure that the trust beneficiary benefits from the money.
A charity as beneficiary. For the philanthropically inclined, naming a charity as a beneficiary means that the death benefit will be immediately paid to the charity upon your death. This timing can be helpful if the charity needs the money quickly or for a large project.
Schedule an appointment to discuss your estate plan - if you already have life insurance, we can review the beneficiary designation to make sure that it fits your ultimate goals; if you don't, or think you need more, we are happy to provide you with some referrals. We are also available to meet with you and your other advisors to ensure that your comprehensive financial and estate plans are working as they should.