Life insurance provides peace of mind for a policyholder and practical support for grieving loved ones in the wake of a policyholder’s death. Parents, spouses and those with major student loan debts often choose to purchase life insurance to protect the people that they love the most.
The payout from a life insurance policy can cover someone’s debts. Those funds can also help the household maintain a certain standard of living even after the primary wage-earner dies. Simply purchasing a life insurance policy isn’t enough. People also need to integrate the payout from that policy into their estate planning.
Life insurance can be a high-value asset that triggers estate taxes. It could also cause disputes among beneficiaries or family members. All too often, testators make a mistake regarding their life insurance when creating or updating their estate plans.
They discuss life insurance in their will
Given that a life insurance policy could lead to a six or seven-figure payout after someone’s premature death, people absolutely want to ensure that the right party receives those funds after their death. It may seem logical to include life insurance proceeds in a will. Someone could quickly and easily clarify who should receive the life insurance proceeds in a testamentary document.
The problem is that often those instructions contradict the paperwork filed with the insurance company. Life insurance companies usually require that those buying new policies fill out specific paperwork designating a beneficiary. That document takes priority over terms included in a will during estate administration.
If someone also mentions their life insurance in their will and names a different beneficiary, the records by the insurance provider are more important than the testamentary documents made by the policyholder. In other words, the failure to update beneficiary designations is a major oversight. Someone’s ex-spouse or a deceased individual could be the beneficiary on record with the insurance company.
People sometimes obtain a false sense of security from updating a will because they don’t realize that the paperwork with an insurance company ultimately determines who receives the funds from their policy. Those creating or updating an estate plan may also need to reach out to their life insurance company to update the documents with that business at the same time.
Ultimately, having proper legal guidance during the estate planning process can help people avoid mistakes that could reduce the impact of their planning.