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How Life Insurance Works with Wills and Trust

How Does Life Insurance Work with Wills and Trusts?

Estate planning can be an intimidating task. However, neglected it can lead to heartache and lost assets. Legal terms are a confusing aspect of estate planning. Leaving you with many questions and few answers. Life insurance often coincides with wills and trusts. But how do they work? 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. This is in exchange for smaller payments while the policyholder lives. Then the policyholder may choose to grant their life insurance money to whomever they wish. Moreover, 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 will distributes all assets after death. A life insurance company distributes the payout. A trust grants a third party authority to settle final affairs. As a result, 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

By working together, a life insurance policy, a will, and trust can help prevent confusion by clearly outlining the intended beneficiaries and ensuring that the assets are distributed according to the wishes of the policyholder, testator, and grantor, respectively. This can help avoid disputes and uncertainties among family members and other parties involved in the estate planning process.

2. Make your final wishes clear

Working together, a person can use a life insurance policy, a will, and trust to make their final wishes clear by specifying how to distribute their assets and to whom, including any specific instructions for the use of life insurance proceeds. This can help ensure that your wishes are carried out after your passing and that your loved ones are provided for according to your intended plan.

3. Keep things in their proper categories

By working together, a person can use a life insurance policy, a will, and trust to keep things in their proper categories by ensuring that they allocate each asset to the appropriate legal instrument. For example, a person can use a life insurance policy to provide immediate financial support to beneficiaries, while they can use a will to dictate how to distribute other assets, such as real estate or personal property. A person can also use a trust to hold assets for the benefit of specific individuals or charities. This helps ensure that a person uses each asset in the most effective and appropriate way.

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. Therefore, you should designate a beneficiary through your insurance policy. 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. A database stores the location of your registered will or other end-of-life documents 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.

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