Life insurance is a powerful tool in estate planning, offering financial security for your loved ones after you’re gone. However, it’s important to understand its limitations and ensure it aligns with your comprehensive estate plan. Here are key considerations:
1. Beneficiary Designations
The payout from a life insurance policy depends on its listed beneficiaries. Failing to update these regularly—after significant life events like marriage, divorce, or the birth of a child—can cause unintended consequences.
2. Probate Avoidance Isn’t Automatic
Although life insurance benefits typically avoid probate, they don’t bypass it if the policy lacks a designated beneficiary or names your estate. This can lead to delays and complications in fund distribution.
3. Tax Implications
While life insurance proceeds are generally tax-free to beneficiaries, they may be included in your taxable estate if you owned the policy. This could affect larger estates subject to federal or state estate taxes.
4. Liquidity vs. Longevity
Life insurance provides immediate liquidity but may not sustain long-term needs, such as a child’s education, ongoing care for dependents, or spousal support. Pairing life insurance with other tools, like trusts, can offer more balanced solutions.
5. Dependents with Special Needs
Naming a dependent with special needs as a direct beneficiary can jeopardize their eligibility for government benefits. Instead, a special needs trust can protect their financial future while preserving these benefits.
6. Coordination with an Estate Plan
Life insurance works best as part of a comprehensive estate plan. Aligning it with wills, trusts, and other estate tools ensures it fulfills its intended purpose.
Take Action
Relying solely on life insurance to provide for your loved ones might leave gaps in your estate plan. Regular reviews with an experienced estate planning attorney such as the Davis Schilken, PC team, can ensure your policy and plan adapt to changing needs and circumstances.
Your family’s financial future is too important to leave to chance. Reassess your life insurance strategy today.