How do wills and life insurance work?
No matter where you are in life, death feels far away and hard to imagine for many people. While you don’t need to dwell on your mortality, end-of-life planning can be important. Preparing now means that you can make sure your loved ones will have the financial support they need when you’re gone.
Life insurance and a will can be essential. Together, they help provide financial assistance to your loved ones and help ensure that your assets are given out according to your wishes. “If you have life insurance, you do need a will, and vice versa,” says Jaclyn Strauss, CPA. She’s the CEO of 2ndVault and an accounting professor at Purdue Global, part of Purdue University.
Here’s what you need to know to get started.
What is the difference between life insurance and a will?
A will is a legal document that outlines how you would like your assets distributed when you die. You’ll name beneficiaries in your will and guardians for minors. You can also provide instructions regarding what, how and when assets are given to beneficiaries. “Without a will, state law will dictate how your assets will be distributed, which may not align with your wishes,” explains Strauss.
Life insurance is a type of insurance policy that pays a sum of money to beneficiaries when you die. While a will deals with the distribution of your existing assets, life insurance is paid by the insurance company to your beneficiaries. If you have a spouse, children, or other loved ones who rely on your income, a life insurance payment can help support them for many years.
“Life insurance is typically purchased to replace lost income your family would need in the event of your unexpected death,” explains Jack Hales. He’s a Dallas-based estate lawyer and partner at Hales & Sellers PLLC.
Hales adds that life insurance is paid directly to your beneficiaries, bypassing any legal (probate) process. Before assets in your will make their way to your heirs, they’ll go through your state’s legal system. During this process, creditors can make claims on any debts you owe. After that, your remaining assets go to your heirs according to your will.
The legal process can be a long one, taking months or even years. Life insurance, on the other hand, can be processed in a matter of days, providing your loved ones with cash that can be used to cover urgent expenses like medical bills and funeral and burial costs.
How do a will and life insurance work together?
Life insurance can be essential for supporting your family when you’re gone. But “it’s not the only puzzle piece,” says Strauss. A will helps protect your family’s financial future by helping to ensure that your estate is properly managed, she explains. It can also simplify the transfer of your assets to your heirs, adds Hales.
Life insurance has unique benefits. It’s paid directly to your beneficiaries and is typically exempt from creditors and, often, taxes too. It can provide financial support to your loved ones much more quickly than waiting for assets from your estate to be distributed.
If your beneficiaries are also deceased, or if you didn’t name a beneficiary, your life insurance will be paid to your estate. When this happens, it’s distributed through your will and may be subject to estate taxes. And creditors can claim it to cover debts.
Coordinating your will and life insurance policy — and keeping them up to date — may help you rest easy, knowing your family can be taken care of.
Do you know the difference between term and whole life insurance? Get the information you need by calling a licensed insurance agent today at (800) 827-9990.
How to make the most of your will and life insurance policy
As you put your will and life insurance policy in place, here are some strategies to keep in mind:
Get helpful guidance. Making decisions about what happens after you’re gone isn’t easy. When writing a will, you’ll want to work with a lawyer who specializes in estate planning. For life insurance, you can call a licensed insurance agent at (800) 827-9990. They can offer you advice on what policy may be right for you.
Have a backup plan. Just as you can’t predict your own future, you also don’t know what might happen to your beneficiaries. With both a will and life insurance, think about a plan B when it comes to beneficiaries, suggests Hales. Without it, “the terms of your insurance carrier will fill in the blanks — for better or worse,” he says. Also, life circumstances change regarding marriage, children and grandchildren. That means you may want a secondary beneficiary, he adds.
Go over your plans annually. As your life changes, so can your will and life insurance policy, says Strauss. You’ll want to review and update both as major life events happen, such as getting married, having kids or buying a home. Even if there are no major changes in your life, it’s helpful to go over your plans regularly, says Strauss. For instance, there may be new assets you’ve forgotten about or medical costs you may need to cover. Reviewing them as part of your annual financial health checkup can keep you on track.
Store records securely and make sure your loved ones know how to access them. Keep your life insurance and will in a safe place, advises Strauss. She recommends a fireproof safe or safety deposit box at your bank. And be sure to let your beneficiaries know where they are and how to access them. She also suggests giving beneficiaries a copy of the documents as a backup.
Don’t put it off. A mistake people can make is simply not having a will or life insurance policy, says Strauss. It’s easy to let these drop down on the to-do list because you think there’s more time. But putting it off can make it harder on your family if something were to happen to you.
HealthMarkets helps make shopping for life insurance easy. Call a licensed insurance agent today at (800) 827-9990.