Interplay Between Life Insurance and Estate Planning: Protecting Your Beneficiaries 

One misconception people have about life insurance is that naming beneficiaries is all you have to do to ensure the benefits of life insurance will be available for a surviving spouse, children, or other intended beneficiary. Life insurance is an important estate planning tool, but without certain protections in place, there is no assurance your spouse or children will receive the benefit of your life insurance. Consider the following examples when evaluating the interplay between life insurance and estate planning: protecting your beneficiaries: 

Example 1: David designates his wife Betsy as the beneficiary on a life insurance policy. Betsy receives the death benefit from the insurance policy, but remarries and adds her new husband’s name to the bank account where she deposited the proceeds. In so doing, she leaves David’s life insurance to her new husband, instead of her children as she and David intended in their estate planning. 

Example 2: Dawn, a single mother, names her 10-year-old son Mark as a beneficiary on her life insurance. She passes away when he is twelve. The court names a relative as a guardian or conservator for Mark until he is of age. By the time Mark turns 18, his inheritance has been partially spent down on court costs, attorney’s fees, and guardian or conservator fees. Additionally, the funds failed to pace with inflation because of the restrictive investment options available to guardians or conservators. Even though Dawn intended the life insurance proceeds to be there for Mark’s college, the costs and lack of investment flexibility mean there may not be as much as Dawn hoped. 

One Solution: Use a Trust as the Beneficiary on Your Life Insurance 

When estate planning, a common method for passing assets is to assign them to a trust, with a spouse or children as beneficiaries. The same approach may also be used for life insurance policy proceeds. You can designate the trust as the life insurance beneficiary, so the death benefits flow directly into the trust. Two popular ways to accomplish this: 

Revocable Living Trust (RLT) Is the named beneficiary 

This option works for those who have a modest-sized estate or who have already set up a trust. Naming your RLT as a life insurance beneficiary simply adds those death benefits to what you already have in trust, payable only to beneficiaries of the trust itself. The benefit of this approach is that it instantly coordinates your life insurance proceeds with the rest of your estate plan. 

Set up an Irrevocable Life Insurance Trust (ILIT) 

For an added layer of protection, an ILIT can both own the life insurance policy and be named as the beneficiary. As The Balance explains, this not only protects the death benefits from potential creditors and predators, but from estate taxes as well.

With the current level of the estate tax exemption, you may not need estate tax planning now.  However, with the current administration, that could change in the near future. Regardless, everyone who has purchased life insurance needs to take an extra step to ensure your loved ones' financial future. To discuss your best options for structuring your life insurance estate plan, visit our website and/or give us a call today. We are here to help you determine the best approach to address the interplay between life insurance and estate planning: protecting your beneficiaries.