People often wonder if they need to include their life insurance policy in their estate plan. Unfortunately, there is no one-size-fits-all answer. It really depends on the situation.
First and foremost, when someone purchases a life insurance policy, they should name a beneficiary. If they do, then that beneficiary will receive the payout from the policy once the insured person has passed away. In this sense, the life insurance payout is not part of the person’s estate, and it skips the probate process.
What if there is not a beneficiary?
Complications can arise if a beneficiary has not been named or if the chosen beneficiary passes away before the policy owner. In a case like that, the life insurance payout may become part of the person’s estate when they pass away.
As such, the estate plan can be used to address how that policy should be distributed. It becomes a financial asset just like a bank account or an investment portfolio that the person owns.
Another thing to consider is whether a trust has been named as the beneficiary. A trust can be a valuable part of a person’s estate plan that stipulates how assets should be distributed and names certain beneficiaries itself. A life insurance policy could pay out into a special needs trust, for example, to avoid disqualifying the beneficiary from government benefits, while still ensuring that they have access to the funds.
Your estate planning options
It is important to consider all assets carefully when drafting an estate plan, including life insurance. Make sure you know what steps you will need to take to create a plan that works for your family.