For many retirees that we help, one of the biggest concerns that comes up during estate planning is that the right people are going to get the right amount of money. Life insurance solves this.
Life insurance is a way to create an estate with the stroke of a pen. It gives a certain amount of money to the exact person or persons you want it to quickly.
Life insurance is especially advantageous for beneficiaries as it protects them from 5 different people or institutions that other forms of money can get stuck at. We go over all 5 of these below!
1. Probate Court
While anything in a Will is going to have to be settled in probate, life insurance benefits bypass probate. They are not included in the deceased assets and are not reported to the court.
The best part about bypassing probate is that your beneficiaries get the money quickly at a time when they probably need it. Usually this takes about 2-4 weeks as long as the beneficiaries send the death certificate in to the life insurance company and answer a few questions.
The only exception to this is if no beneficiaries are named or if the named beneficiaries are deceased or minors. Life insurance will go into probate to determine who the benefits should be sent to or the proper procedures to follow.
If the deceased owed some money, creditors have no claim against life insurance benefits paid out at their death to beneficiaries.
This provision was originally put into place to protect widows and orphans, and the sentiment of this still holds true today. When someone dies, many times their beneficiaries need this money to continue paying their bills and buying necessities.
Life insurance makes sure that your loved ones will have access to the money, not someone else.
Another institution that life insurance benefits avoid is the IRS.
Life insurance benefits are paid to beneficiaries tax-free, meaning the IRS does not get any of this money.
You do not want to leave your loved ones with a huge tax bomb at your death; life insurance allows you to do this.
4. Life Insurance Company
While this might seem odd, the benefits you purchase from a life insurance company are protected from the life insurance company themselves.
How does this work?
Almost all life insurance comes with an incontestability clause. This clause states that the insurance company cannot void, or not pay, the benefit due to a misstatement by the insured after a set amount of time.
Normally, this is 2 years. Basically, once you hold a life insurance policy for over 2 years, the company can not come back and claim that you lied or falsely represented yourself or your health to get approved for the policy.
Your benefit is safe and will be paid out by the life insurance company to your named beneficiary.
5. Other Family Members
The only person or persons who have access to the life insurance benefits are going to be the named beneficiaries on the policy.
No matter what your Will or any other document says, the beneficiary designation on a life insurance policy is set in stone.
Once your beneficiary gets the benefits, no other family member or friend legally has the ability to say that they are entitled to any of the benefits.
This is so important to keep in mind when making beneficiary designations. Beneficiary designations trump your Will. If you have someone named as a beneficiary on your life insurance policy, or even your IRA or 401(k), they are going to get that money no matter what your Will says.
We have seen ex-wives, deceased spouses or children, and estranged children be named as beneficiaries and get the benefit even when the Will was changed to remove these individuals.
Make sure to check your beneficiary designations regularly, especially when a life changing event happens, to make sure that they are correct.
Life insurance is a powerful tool. Cardinal is here to help you look at your options. We are also here to help your beneficiaries navigate the benefits when that time comes.