If you are like most people, you probably only have a vague understanding of the purpose that life insurance is supposed to serve. And you may not know that life insurance may impact your estate planning. So when you start thinking about Wills, Trusts, advance directives and more, you may also want to start thinking about life insurance.
Life insurance is supposed to protect your family and other loved ones from the hefty financial loss they could face when you pass away. In case you find yourself losing a family member, their life insurance could help provide for their family.A main type of life insurance is a term life insurance policy. A term life insurance policy has no cash value, but offers death benefits for a certain period of time if the policy holder passes away.
A trust is a legal document that lets you as the grantor designate a trustee who will manage your beneficiaries’ assets. So when you create a life insurance trust, you give your trustee authority related to the trust. That means your trustee hands out the death benefit funds according to your wishes in your trust. A life insurance trust is handy if your beneficiaries are minors, or if you want them to reach certain milestones in life before they receive the death benefit money.
Life insurance is normally not directly part of your estate, since it is meant to be payable immediately upon your passing. Unlike the rest of your estate, life insurance death benefits can avoid the probate process by going directly to your beneficiaries after you die.
Estate planning works by providing for your loved ones after your death. This is also the purpose of life insurance. When you combine the two, your life insurance policy can provide financially for your loved ones immediately after your death.
Perhaps you have not designated a beneficiary to receive your life insurance death benefits. If that’s the case, your life insurance will go to the estate after you pass away. Now your life insurance funds are part of your estate and subject to the same consequences of probate that the rest of your estate may be subject to. Those whom you have designated in your estate planning documents can eventually receive what’s left of your life insurance benefits, but it can be reduced by expenses and debts of the estate.
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