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The Relationship Between Life Insurance and Wills

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Having a financial plan includes planning for what will happen to your family after you die. No one likes to think about their death, but preparing for it is essential. Without having some basic estate planning in place, your family could be left financially scrambling if you were to unexpectedly passed away.

Think about this, if you were to pass away at this very moment, would your family know what to do? Would they have the savings to pay for your funeral cost? Would they have the financial stress of making sure that everyday bills would be paid or have the money coming in each month to keep up with mortgage payments, all during a time of grief and loss?

A plan in place can significantly reduce the worries and stresses placed upon your family due to a sudden passing. While you can’t live forever, you can take steps to ensure that your family will be financially secure and stable when the time does come.

Those steps include having a will along with a life insurance policy.

Most people are familiar with these two popular estate planning tools but may not be as familiar with using them together. As a result, it’s common to have questions such as:

  • Do I need to have both a will and life insurance policy in place?
  • Does one override the other?
  • Does one get money to my family faster?

The answer to all three of these questions is yes. However, you’ll need a lot more than a one-word answer to start the estate planning process. That’s where our guide comes in. Read on to learn all you need to know about wills, life insurance, and how you can use both in your estate plan.

Estate Planning Basics

Estate planning is the process of determining what will happen to your assets and debts when you pass away. For example, there’s a common misconception that your estate only includes your home, but that’s not the case.

Instead, your estate is made up of all the things you own that have significant value. Generally, estates can be broken down into three categories: gross estate, residue estate, and estate debt.

Gross Estate: Your gross estate makes up the most significant part of your estate as it includes both your property and any accounts that determine your overall net worth.

  • Property, such as your home, vacation homes, buildings, barns, or any other structure, including vacant land, will all fall under your gross estate.
  • Accounts such as your banking accounts, investments, retirement accounts, pensions, and even life insurance policies will also fall under your gross estate.

Residue Estate: Your residue estate is the personal items you own worth a significant amount of money. This might include any cars, artwork, jewelry, antiques, or high-end furniture you own.

However, what counts as a valuable item is highly individual and depends on what you’ve accumulated in your life. For example, maybe you don’t have any artwork, but you do have a collection of vintage guitars worth thousands of dollars.

In this case, the guitars would be part of your estate. But, conversely, someone who had a single guitar worth around a hundred dollars probably wouldn’t include it in their estate planning.

Estate Debt: Your estate is also made up of any debts you owe. This can include:

  • Mortgages
  • Car loans
  • Business loans
  • Personal loans
  • Credit cards
  • Medical bills

The total value of your estate is the sum of your assets minus the sum of your debts. If you want to pass the value of your estate when you die, you’ll need legal documents in place.

There are a few different ways to do this, and the right solution for you will depend on your financial and personal situation. However, it’s always a good idea to have both a will and a life insurance policy in place.

The Importance of a Will

Your will is a legal document stating how your final wishes are handled for your estate after you have passed. Having a will in place provides clear instruction, ensuring that all your assets will be passed in the way you intended.

This can be especially important if you want to pass on pieces of your estate to multiple parties. For example, you might want to set aside parts of your estate for each of your children. On the other hand, if you don’t write a will, the state may have to determine how to distribute your assets when you die, especially if there is a dispute among the existing family members.

You can also select an executor when you write your will. An executor is a person who will be responsible for distributing the assets of your estate. This includes contacting everyone listed in your will and ensuring your wishes are met.

You can create a will with the help of a lawyer, estate planner, or financial planner. They can help you figure out the best plan for your assets, get a realistic picture of your debt, and guide you through the process. They can also help you get your will notarized to make it legally binding. 

You also have the option of creating your will on your own. Multiple online services will provide a template and guidance for you. There is a fee for most online services, but a few are completely free if you only want the will template.

Even when there is a fee, it’s generally much less than you’d pay to use a lawyer, estate planner, or financial planner. Alternatively, you can choose to create will by simply typing out or handwriting your own document. As long as this document is witnessed and notarized, it will be legally binding.

The Importance of a Life Insurance Policy

A life insurance policy isn’t part of your will. It’s an entirely separate legal document. A will is used to help provide clear instructions on how your assets are to be handled after your death. A life insurance policy provides financial security in the form of a death benefit payment payable to any beneficiaries named on the policy.

When you buy a life insurance policy, you buy a contract between you and a life insurance company. That means that as long as you hold up your part of the agreement, the life insurance company will hold up theirs.

Your part of the agreement in the contract includes being truthful during the application process and making sure that you pay your premiums when due. Not paying your premiums will break the contract and result in your policy lapsing. When a policy lapses, it will terminate, and the death benefit will no longer exist.

Putting false information about your health, hobbies, or other lifestyle factors on your application could be deemed insurance fraud, resulting in a denial of the payout.

The entire concept of the life insurance contract is the death benefit which is payable upon death and as long as the life insurance contract is active at the time of your death. Therefore, the death benefit of a life insurance policy is paid out as soon as the insurance company receives proof of your death and the beneficiary’s identity.

Life insurance death benefits have many important factors you should know:

Provide a replacement of income: A will divides the assets you already have. A life insurance policy can account for the income you’d bring in if you were alive. Life insurance policies ensure that your family will still have access to the same amount of funds and financial security, even if you’re not there to provide it.

Money is available in just a few weeks: Money from a life insurance policy pays out often quickly. The exact speed will depend on the company, but some will payout in as little as 72 hours. The average life insurance payout time tends to be around 10-30 business days from when the life insurance company receives the claim paperwork.

Life insurance benefits aren’t taxed: The death benefit money received from your life insurance policy isn’t subject to taxes. That means your family will get the exact amount you intended. 

Life insurance policies can’t be garnished: Any debts you owe can be taken from the assets in your will. This is different from a life insurance payout. Creditors cannot touch the money your beneficiary receives from your life insurance death benefit by law.

Quick note: The only time a creditor may access a death benefit payout is if it was paid directly to your estate. This would generally only happen if you choose to have your estate as your life insurance policy beneficiary.

Life Insurance Beneficiaries Versus Parties Named In A Will

All life insurance policies need to have a beneficiary or beneficiaries named. In addition, most life insurance companies will ask you to name both a primary beneficiary and a contingent beneficiary.

The contingent beneficiary is a backup to the primary beneficiary. For example, a contingent beneficiary would only receive the death benefit payout if your primary beneficiary passes away before you do or if the primary beneficiary could not be located after some time has passed.

When naming a life insurance beneficiary, it must be someone who would be impacted financially due to your death. This could include your spouse, children, business partners, etc. Insurance companies will even allow specific organizations such as close charities, former colleges, or your church to be named beneficiaries.

Although your life insurance beneficiary might be one of the people named in your will, it’s essential to keep these two documents separate. You can’t use your will to override or change your life insurance beneficiary. Your life insurance policy will always be paid to named beneficiaries, no matter what your will says.

For example, let’s say you set your will and life insurance policy up in your 30s. You name your spouse as the beneficiary on your life insurance policy and designate personal assets to your spouse in your will.

At 45, you get divorced. You change your will so that the assets marked for your spouse will now go to your children instead. You use your will to state that your oldest child should also receive your life insurance death benefit, but you never change the beneficiary on your actual life insurance policy.

Now let’s say that you pass away at 58. You’ve told your children about your will, and your oldest child is expecting to receive both the assets in your will and your life insurance payout. But, unfortunately, since you never changed the beneficiary on your life insurance policy, that money will go to your former spouse and not your oldest child.

Put simply, your life insurance policy benefits will remain in place unless you change your policy. Legal events like divorce, and legal contracts like wills, can’t override a life insurance policy. Only the policy owner has the authority to make changes to the life insurance policy. So, if you’re updating your will after a major life change, make sure you update your life insurance policy along with it.

Making sure that you’re reviewing both your life insurance policy and wills every few years to make any necessary changes can help your loved ones stay out of potentially lengthy and unwanted legal battles often referred to as probate court.

What Is Probate

Probate is the legal process that confirms a will as authentic and ensures all debts to creditors and any owed taxes have been paid. Probate fees vary by state. Some states charge a flat fee, while others charge a percentage of your total estate. Either way, those fees will come out of the total value of your estate. 

The probate process timeline varies as well. Probate could take a few months or several years, depending on your state, how complex the will is, and other factors. No matter the fees or timeline, your executor can’t distribute any portions of your estate until the probate process is complete.

When Life Insurance Goes Through Probate

Life insurance doesn’t usually go through the probate process, but it can happen in some circumstances. For example, when there is no named beneficiary on a life insurance policy, the death benefit will be paid to your estate. This can also happen if your beneficiary has passed away or can’t be located.

When your death benefit is paid to your estate, it’s subject to probate fees, taxes, and creditors. That means your loved ones will end up getting less money than you intended. Plus, going through your estate will take time. So it could be years before your family receives what’s left of your insurance policy.

To avoid probate, it’s always best to name a primary beneficiary and a contingent beneficiary. Anytime you have had a life event that could affect your life insurance policy, you should update your life insurance policy, especially when it requires changing your beneficiaries.

Challenging A Life Insurance Policy

In most cases, life insurance payouts are a simple process. The claims process begins with the insurance company being notified that the death of the insured has occurred. The insurance company will then send out death claim paperwork to the beneficiary to complete.

Once the claims paperwork has been completed by the beneficiary and returned to the insurance company, the claims paperwork will be processed, and the death benefit will be paid out to the beneficiary.

However, there are always complicated situations and scenarios that fall outside of the normal process. For example, let’s say you’re going through your recently deceased grandfather’s financial files and find a life insurance policy.

You remember the policy being taken out several years ago and your grandfather telling you that you were the policy’s primary beneficiary. However, you notice paperwork within his files showing a recent beneficiary change listing the neighbor as the primary beneficiary.

Your grandfather had been diagnosed having dementia in the last years of his life, and you’ve suspected for years that this neighbor might have been taking advantage of this to get money from him. 

In this case, you might be rightfully concerned that your grandfather was not in sound mind when making the beneficiary change to the neighbor. Thus, you might have a case to challenge the life insurance policy.

Of course, you’d have to make a case that your suspicions about the neighbor were correct and that your grandfather was unable to make a  complex decision at he changed the beneficiary.

This might sound like a dramatic scenario, but families sometimes find themselves in tense situations when a loved one dies.

Locating Beneficiaries

We’ve all read sensationalist stories about people inheriting money or receiving life insurance payouts from long-lost relatives. While someone’s forgotten great aunt leaving them half a million dollars can be a heartwarming story, it’s best to avoid this scenario. Instead, it’s much better for everyone if your beneficiaries know that you have a life insurance policy.

Of course, that’s not always how it works out. Life insurance policies are lengthy contracts. Even term policies will last at least ten years, and whole and universal life policies will last your entire life. That leaves a lot of time for things to change or for a person to simply forget who they named as beneficiaries. Sometimes a life insurance policy is entirely unknown until after the policy holder’s death.

When a policy is discovered, it’s up to the executor handling the estate to find the named beneficiary. If that beneficiary can’t be located or the executor finds that they’ve passed away, they’ll have to search for the contingent beneficiary. This process can take months.

That’s why it’s best to tell your beneficiaries about the policy. It’s also a good idea to choose beneficiaries who are close family members or friends. That way, it’s likely they’ll know right away when you die.  They can then make the death claim on your policy themselves and speed up the process.

Frequently Asked Questions About Wills and Life Insurance

Estate planning is a complex topic, and we understand you may have questions. Take a look at some of the top questions about the two popular estate planning tools to see if there is an answer to your questions.

If we missed answering your specific question, at the bottom of this FAQ section, you will find a form where you can send us a question, and we will respond with an answer.

When is life insurance not needed?

When you have someone close to you who would be financially impacted negatively due to your death, it’s a reason to purchase life insurance. The death benefit from a life insurance policy removes that financial impact by providing immediate funds to the policy’s beneficiary.

However, there are times when life insurance is simply not needed. For example, if your death is not going to place a financial burden on someone close to you, you may not need a life insurance policy.

If your children are grown and self-sufficient, and in your retirement years, you may not need a life insurance policy. Even then, some people will opt to purchase a small burial insurance policy to cover those end-of-life expenses. But again, if you have enough savings to self-pay for those costs, you may not need a life insurance policy. 

When is a will not needed?

A will is a beneficial tool in laying out a structured plan for how your assets should be divided out when you pass away. However, there are a few circumstances in which you may not need a will.

For example, if you are young, single, and have no children, you really don’t need a will just yet. Likewise, if you are someone with no significant assets, you probably do not need a will.

However, as time goes by, that can easily change, and if it does, it’s not a bad idea to create a will. It’s a very inexpensive cost that can relieve a lot of potential stress on your family members. 

Do I need a will if I am leaving everything to my spouse when I die?

Naturally, if you’re married, your spouse will be the person that will inherit your personal belongings. This is especially true for any items that have been co-purchased during your marriage. 

So to answer the question as to whether or not you need a will if you are married, it will be left to personal preference. However, it’s not a bad idea to have one in place, especially if there are personal items that you would like to leave to individuals who are not your spouse.

Another factor to look at is if your spouse were to pass before you or if you or if you and your spouse were to pass away at the same time. If that were to happen, a will in place will explain how your assets should be carried out.

What is the difference between a will and a trust?

A trust is another tool you can use in estate planning that shares similarities of a will. Both designate how assets are to be handled after a death has occurred.

However, when you create trust it begins working immediately, whereas a will doesn’t go into effect until you die. A trust allows you to designate financial assets to set people at set times or for specified purposes.

For example, you could set a trust that could only be accessed for education costs. You can include trusts as part of your will or manage them separately. However, there are numerous fees associated with trusts, and they can be complex to set up and manage.

Having a trust does create a few advantages. The primary benefit is that the money in the trust won’t be taxed the way your estate will be. They also don’t go through the probate process, meaning they can be accessed faster.

You can name a trust as the beneficiary of your life insurance policy. This avoids the fees associated with your death benefit going to your estate. It can also be helpful for some situations, like if you want your life insurance death benefit to go to your oldest child but don’t want them to access it until they’re 25.

How can I make sure my beneficiary gets the death benefit?

When completing a life insurance application, there will be a beneficiary section where you will need to name a primary beneficiary and have the option to list a contingent beneficiary.

When completing the beneficiary section of the life insurance application, you will be required to provide contact information for each beneficiary you list on your life insurance policy. That information will include their address, telephone number, personal information such as their date of birth and social security number, along with their relationship to you.

It’s always a good idea to make sure you’re reviewing your life insurance policy every few years to make sure everything is up to date, including your beneficiary information. 

If there have been changes, especially to the beneficiary’s contact information, you must update the new contact information with your life insurance company.

While ensuring that all information is up to date with your policy and the insurance company, it’s also vital that you notify your beneficiary of your life insurance policy and where they can find the policy when you die. Give them details, and let them know the name of the company your life insurance policy is with.

What if I don't have a will or beneficiaries?

When you don’t have named beneficiaries or when your beneficiaries have passed away, your policy becomes part of your estate. If you don’t have a will, the state will decide how to divide the assets in your estate, including your life insurance policy.

So, without a will or named beneficiaries, your life insurance death benefit will go through probate, be subject to fees, and be given to whichever party or parties the state determines.

Can anything override a life insurance policy?

As discussed above, life insurance policies can’t be overridden by wills or events like divorce unless court-ordered.

This might happen in a few situations, but it’s most common in cases where divorce and children are involved.

For example, let’s say you name your spouse as the beneficiary of your policy. You have two children together and get divorced when those children are still minors.

Your ex could get a court order stating they needed to remain your life insurance beneficiary because they would need the funds to care for your children in the event of your death.

In this case, even if you change your beneficiary on your policy, the court order would override it, and the death benefit would go to your ex.

Have a question?

Do you have a question about life insurance and wills or just a general life insurance question? Please, ask away, and we will be sure to get back to you with an answer.

Plus, if we think your question can help our community of readers, we will be sure to add it to the FAQs listed here within the article.

Final Thought

Wills and life insurance are two critical pieces of estate planning. Your will accounts for all the finances and things you already own. Your life insurance policy accounts for the income that would be lost if you were to die.

Having both in place helps ensure your loved ones will have security. Plus, while wills can take years to distribute assets, a life insurance policy can payout in a matter of days. Together, the two legal documents can protect your family in the short term and the long run.

Applying for a life insurance policy can be complicated and time-consuming, but it doesn’t have to be. With no exam policies, you can apply for a policy from the comfort of your home. There’s no medical exam to take, and you’ll get an answer fast.

If you’re thinking about a no medical exam life insurance policy, we can help. Just fill out our quick form to get no-obligation quotes from the top life insurance companies. Then, when you’re ready to apply, we will help you with the entire process to make it smooth as possible.

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Picture of Jeffrey Manola - Life Insurance Expert
Jeffrey Manola - Life Insurance Expert

Jeffrey Manola is the founder of No Medical Exam Quotes, an online insurance agency that strongly focuses on helping people shop for the perfect life insurance policy. He is a licensed life insurance expert and content creator for the website.

Before becoming a life insurance agent, he served in the United States Marine Corps, transitioning from serving his country to helping families find affordable life insurance coverage beginning in 2009. Since starting a career as a licensed life insurance agent, Jeffrey has helped thousands of families with their life insurance needs.

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