Life insurance can be an important part of your estate plans. Having the right life insurance coverage can help ensure that the right amount of money is available to fulfill your plans for your loved one’s future. Life insurance makes it possible to care for your loved ones even when you are no longer here. With that said, not everyone needs life insurance.

Who benefits from having life insurance?

This is not meant to be a comprehensive listing of everyone who could benefit from having life insurance, but is a few of the most common groups:

Parents of young children

Losing both parents or the sole financial provider in a family can put a financial strain on the surviving parent or a guardian. A life insurance policy designed to pay for the expenses for children until they reach adulthood can provide peace of mind for parents. It can also ease the financial burden put on a guardian if both parents should become deceased at the same time.

Business owners

There are many situations in which life insurance can be helpful to a business owner. Suppose you own a business with a partner. If you have life insurance that covers your business partner and they become deceased, your life insurance policy provides the financial means to buy the deceased partner’s interest in the business from their family. Doing so means you do not have the financial strain of paying from the business or out-of-pocket, and the deceased partner’s loved ones get their rightful inheritance from the business interest.

Another possibility is that you have life insurance on yourself. Only one of your children is interested in inheriting your business. Your life insurance can provide cash to the children who do not inherit the business, so the value of each child’s inheritance is equal.

Caregivers for a family member with a disability

If you have a family member who relies on you for part or all of their financial support, having a life insurance policy that will provide the necessary funds to continue to care for them can be reassuring. However, if your loved one is receiving or eligible for government assistance, you must be cautious about naming them as the beneficiary of your life insurance policy. Receiving your life insurance payout may disqualify them from receiving their government benefits.

People who want to donate to charities

A life insurance policy can allow you to leave a larger financial gift at your death than you may have been able to afford throughout your lifetime. It is also an effective way to fund your charitable endeavors without taking from accounts or property that you intended to leave to your loved ones.

People who may have a large estate tax bill when they die

Life insurance can provide your loved ones with the funds they might need to pay your tax bill at death. Having cash from a life insurance policy is easier to use for this purpose than trying to liquidate accounts or property that may be hard to cash in or sell. People who will owe estate tax because their accounts and property are valued higher than the lifetime exclusion at their death may consider this option.

The Importance of Designating the Right Beneficiaries

If life insurance will serve a need for you and you have taken out a policy, the next step is considering your beneficiary options. Here are some potential scenarios:

No beneficiary

If you do not name a beneficiary, then the policy agreement’s default rules will be followed to determine how your death benefit will be distributed. The proceeds may be distributed to your spouse or heirs as detailed in the plan agreement or by following state law. Another option is that it will be distributed to your estate, and then your loved ones will have to go through the probate process for access to your death benefit.

A minor as the beneficiary

If you choose to name your child or grandchild as your beneficiary, the court will need to select someone to hold the money for the child until they reach the age of majority. Depending on your state, this may be eighteen or twenty-one. Minors cannot legally own or control their money until they are adults. However, once they reach adulthood, the full death benefit will be distributed to them. Then, they will have the full legal right to spend it how they want, with no restrictions.

An adult as the beneficiary

An adult beneficiary can immediately receive the death benefit from your life insurance policy. However, depending on the situation, this may not be ideal. Imagine what could happen if your adult child received the full life insurance payout at one time. Would they have the financial skills to manage it well? Is there a risk of it being taken by a divorcing spouse or subject to be collected to satisfy an outstanding debt or judgment? In these cases, it may not provide for them in the way you intended.

A trust as the beneficiary

If a trust is your beneficiary, then the money from the life insurance will be paid to the trustee, along with instructions on how and for whom the money is to be used. Making the trust the beneficiary provides options to increase protections against creditors, divorcing spouses, and predators. This can help ensure the money is used as you intended.

A charity as the beneficiary

If you have a favorite charity and name them the beneficiary of your life insurance, the death benefit will be paid directly to the charity upon your death.

Your estate attorney can help you determine whether life insurance is a good estate planning tool for you. We can also help you review your beneficiary designations to ensure they fit your financial goals.

You are welcome to schedule a call with us or reach us directly at 855.434.2062 to learn more about how best to plan today to protect those most important to you.