How Does Life Insurance Impact Estate Planning?

Key Takeaways 

• Life insurance plays a crucial role in estate planning by providing financial protection for loved ones, helping to cover outstanding debts, funeral costs, and maintaining their quality of life.
• Life insurance benefits can be passed on to beneficiaries without going through probate, saving time, money, and potential tax burdens.
• By including life insurance in an estate plan, you can safeguard assets, provide liquidity, and maintain control over the distribution of funds to your beneficiaries.
• When setting up a life insurance policy, it's essential to avoid common mistakes such as purchasing insufficient coverage, naming the wrong beneficiary, and delaying securing a policy.

1. Life Insurance Helps You Leave a Legacy

If you have goals for your family, like sending a kid off to college one day, life insurance gives you a way to provide a meaningful inheritance for those who depend on you. Life insurance beneficiaries get access to the death benefit without having to go through court, also called probate when related to estate planning. That saves time, money and hassle during what’s often already an emotionally charged time.

Plus, with life insurance, the proceeds typically aren’t taxable as income. You may be able to pass on finances without making your beneficiaries pay taxes on them, as long as the benefit amount doesn’t exceed federal or state exemptions.

2. Life Insurance Offers Protection for Debt & Expenses

Many people carry some form of debt, whether it’s a mortgage, car loan, student loan or credit card debt. The amount of consumer debt in the U.S. increased to $16.38 trillion in 2022, according to Experian, up from $15.31 trillion in 2021.

If you have any outstanding debts, a life insurance payment gives your beneficiaries the means needed to cover any debt, tax obligations and ongoing expenses you had, without having to use their own finances.

Again, when assets are tied up in probate court, that could force survivors to accumulate their own debt in the meantime to cover expenses while they’re waiting for court to play out. A beneficiary can file a life insurance claim and receive funds in as little as a few weeks.

3. Life Insurance Safeguards Assets

In a scenario where life insurance isn’t part of the estate planning process, loved ones may feel pressured to sell off assets to get the money needed to pay outstanding debts and bills, or even to cover taxes on assets in an estate. This could result in situations like letting go of a beloved family home, selling a treasured family heirloom or putting up an inherited asset for sale in order to make ends meet.

Life insurance helps protect other assets that may be included in an estate plan, like a house, vehicle, jewelry or other valuable object. These assets may carry important sentimental value, as well, which you can protect for your loved ones with a life insurance policy.

4. Life Insurance Provides Liquidity

A beneficiary can spend the money from life insurance benefits however they’d like. That means, a policy provides liquidity for whatever expenses come up.

That can give your family peace of mind that there will be money available to cover anything that’s needed. You can’t predict the exact future, but you can ensure there are funds available to pay for whatever’s needed.

5. Life Insurance Helps You Control Distribution

Back to probate. Even when family and loved one situations are calm and peaceful now, when a loved one dies and court is involved, things can get ugly. Fighting over family finances in court can tear families apart, unfortunately. Strategic estate planning and life insurance gives you more control over your finances and helps prevent problems.

With your life insurance policy, you’re in control of how funds are distributed. You can tell your family members as soon as you set up a policy what will happen, so there are no surprises and everyone has clear expectations.

This can help alleviate unnecessary stress and conflict. If you love your family and want to protect their relationships, deciding what will happen with your estate now can help avoid future issues.

Avoid These Mistakes When Setting Up a Life Insurance Policy

Getting a life insurance policy makes sense for many people. If you have anyone in your life you want to protect financially in the future, including a spouse or kids, we highly recommend securing a life insurance policy now. If you have debt, life insurance also helps protect your loved ones with the financial means to cover outstanding expenses.

The earlier you apply for a life insurance policy, the more likely you can secure a lower monthly premium. As you go through the process, some things to avoid are:

• Getting a policy with too little coverage: Some life insurance coverage is better than none, but the point of life insurance is to provide the coverage your loved ones will need. Your life insurance broker will help you calculate life insurance coverage. You’ll want to factor in monthly expenses, outstanding debt and the financial legacy you want to leave to find an accurate total coverage amount.
• ]Naming the wrong beneficiary: You’ll want to ensure your life insurance benefits go to the right person(s). Your desired beneficiary may change over time (for example, if you get divorced), so make sure you revisit your policy and update it as necessary every year.
• ]Delaying securing a policy: For some life insurance policies, the younger you are and the better health you’re in, the less expensive your policy will be. That’s why it can be more cost-effective to secure a policy as early as possible, since you can lock in lower rates now and avoid higher rates as you age or your health condition changes.

Finally, a major mistake people make is choosing the wrong type of life insurance policy. There are lots of options to choose from, including one that will make the most sense for your unique needs. A life insurance broker will explain various types of policies and recommend a selection that’s cost-effective, while providing the coverage you need.

Talk with a Life Insurance Broker to Learn About Your Options

If you already have an estate plan but no life insurance, or you’re new to estate planning, make sure life insurance is part of your plan. You can provide tax-free financial benefits to your loved ones, so they can cover outstanding costs and get the financial support they need.

Our team is ready to help you. Contact us for a free consultation by filling out the form online, calling 602.617.4107 or emailing quotes@azhealthinsurancebrokers.com for information.