Many individuals get confused by the many legal terms thrown around when estate planning. How does life insurance interact with wills and trusts, and is one controlled by the others? Let’s take a closer look.
What is Life Insurance?
Life insurance is a written promise between an insurance company and a policyholder. It promises to pay a certain amount of insurance money upon the policyholder’s death in exchange for smaller payments while the policyholder lives. The policyholder may choose to grant their life insurance money to whomever they wish. If the policyholder is married or has children, life insurance benefits are usually given to the immediate family.
What is a Will?
A will states how you wish your property, money, and other assets to be distributed upon your death (or in the event, you lose the ability to take care of it anymore). Additionally, it names an individual with the authority to manage your affairs should you become unable to, or until all matters are fully settled. Your will is extremely important, as it removes any confusion as to your final wishes.
What is a Trust?
A trust allows a third party (the trustee) to act on behalf of the trustor for the beneficiary. For instance, the trustor might grant the trustee authority to care for a minor beneficiary’s money until the beneficiary is old enough. There are quite a few reasons a trust might be necessary.
How Do the Three Work Together?
A life insurance policy is paid for by the insurance company. A will distributes all assets after death. A trust grants a third party authority to settle final affairs. Each factor plays a separate role in the final “settling” process, but each must work together. Your lawyer will help you take care of the details of each item. However, working together, a life insurance policy, a will, and trust provide the following benefits.
1. Help prevent confusion.
2. Make your final wishes clear.
3. Keep things in their proper categories.
If you haven’t already settled your end-of-life documents and affairs, make sure you contact your lawyer as soon as possible.
Can You Designate Life Insurance Beneficiaries in Your Will?
Remember, your life insurance is paid by the insurance company upon your death, so it is not technically part of your assets. Your will distributes your assets. There is rarely a crossover between your will and your life insurance policy.
The exception would be if all of your beneficiaries happen to die before you do and you never get the chance to name a new one. Life insurance proceeds are then paid to your estate and become assets. From there, rules of the will apply.
Where Does the U.S. Will Registry Come In?
The U.S. Will Registry was founded in 1997 to fill an important gap. The location of your registered will or other end-of-life documents is stored in a database for later access. We provide families and beneficiaries with a means to find lost wills and estate planning documents of those who have passed away.