When you’re doing your estate planning, it’s easy to assume that the estate plan is going to govern everything that happens when you pass away. For instance, you can use your will to decide which assets are going to go to which beneficiaries. Your estate plan gives you control over what happens to the things that you own and how the process of asset distribution will play out for your family.
As a result of this broad purpose, if you have a life insurance policy, you may believe that you need to use your estate plan to divide this policy among your beneficiaries. For instance, perhaps you were a young parent with one child when you purchased the policy. You now have four children, so you want to split the total equally between all of them – 25% to each. Should you just specify how they are supposed to divide the life insurance payout in your estate plan?
Life insurance beneficiaries
It is a myth that you need to address your life insurance in your estate plan, at least in most cases. As a general rule, the life insurance beneficiary designation itself is going to supersede anything that you write in your will. The reason for this is that you are supposed to name a beneficiary when you buy the policy. That is the only instruction that the life insurance company has to follow.
For example, you could write in your will that you want all four of your children to split up the money from the policy equally. But if only your first child is named as the beneficiary of the whole policy within the policy documents themselves, the life insurance company is going to follow that instruction – paying 100% to your eldest child. It would then be up to your child to decide if they wanted to share the money with their siblings, knowing that that is what you wanted. But they wouldn’t be legally obligated to do so, and the insurance company would not be obligated to divide the money at the time that it was distributed in accordance with your will.
Creating your estate plan
This is just one area where estate planning can become fairly complex. When dealing with these types of financial issues and thinking about your family’s future, it’s very important to understand what legal options you have available to you. Seeking legal guidance can provide valuable clarity in this regard.