Many people have life insurance to provide for their loved ones in the event of their untimely death. This is a great estate planning tool when used properly.
RumboughBe aware of a few things, though, to make it work in the best manner possible. First, if you want to benefit a loved one with the proceeds, be sure to name that person as the beneficiary of the policy. Also, make sure you name an alternate beneficiary, in case the first person happens to pass away before you do.
Sometimes this is overlooked, and the life insurance is paid to the deceased person’s estate. This may be what you intend to do; however, when a designated beneficiary is named, the proceeds are paid directly to that person within a few weeks, and it avoids probate. This is helpful for those who need the cash to take care of monthly expenses while settling the estate.
When you are planning your estate, remember that the division of assets that occurs through your will does not include any assets that are distributed directly to the beneficiary.
For example, if you divide your estate equally between your two children, but name only one child as the beneficiary of life insurance proceeds, then that child will get all of the life insurance, plus one-half of all your other assets.
Don’t depend on your child dividing insurance with others after you have passed away. By law, that money belongs to that child, and any distribution they make would be considered a gift from them and not you. If other family members wanted to get what they felt was their portion of the money, they may have to bring a lawsuit against the child, and they would need to do it in a hurry, before it is spent. Otherwise, if they did win the lawsuit, they may have a really hard time collecting.
If you have named a beneficiary of a life insurance policy as payment for a debt owed, be sure to have a written agreement outlining the terms of this agreement. Otherwise, any debts you have will be paid out of your other assets, not the life insurance proceeds. This not only applies to life insurance, but retirement accounts and other assets in which you can name a beneficiary outside the will.
If you need help planning your estate, contact your attorney or the Baptist Foundation.
– Rumbough, CPA, CFP, is chief operations officer with the Baptist Foundation of South Carolina. Contact her at 800-723-7242. In accordance with IRS Circular 230, any U.S. federal tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.