How Life Insurance Fits Into Estate Planning

When you buy life insurance, you may have several goals in mind. In addition to helping you leave money behind for your survivors, life insurance can act as a powerful estate planning tool. 

Here’s more on how your life insurance policy can resolve your debts and leave your beneficiaries financially secure. 

How Life Insurance Fits Into Estate Planning 

You can use life insurance to provide for a surviving spouse or to ensure that those who are financially dependent on you receive enough money to support themselves. Also, a well-planned life insurance policy can cover your final expenses. Most life insurance policies allow you to name one or more than one beneficiary. If your beneficiaries outlive you, the life insurance goes directly to them without passing through probate. 
 
The law doesn’t require your beneficiaries to pay your unsettled bills with this money. In most cases, survivors do not bear the responsibility for unpaid debts when you die. To fully understand your situation, you can get advice from your insurance agent, as well as a qualified attorney. It’s important to know any exceptions that apply to you. 

What If Your Beneficiary Dies Before You Do? 

It’s easy to assign beneficiaries and then forget all about your policy. If one of your beneficiaries dies before you, it’s important to update your beneficiary form. Otherwise, the proceeds may pass to heirs-at-law, and they won’t be available to debtors making claims on the estate. Alternately, the proceeds may go into probate, where your debtors can seek payment from the estate. Ideally, you should keep your paperwork up to date and maintain control over the proceeds of your life insurance policy. 

Making The Estate Your Beneficiary 

You can also make your estate the beneficiary of your life insurance policy. This allows your life insurance payout to settle your final bills. Consequently, certain assets may stay available for distribution. Keep in mind that the life insurance proceeds add to the taxable value of the estate you leave behind. 
 
It may be a good idea to talk to your life insurance agent and a good estate planning attorney to make the best decisions for you and your family. Another option involves setting up a trust and making that the beneficiary of your life insurance policy. This helps your heirs bypass probate and may get money into your loved ones’ hands when they need it the most. It also helps you provide for a beneficiary who doesn’t handle money well.