You Cannot Divide Life Insurance With Your Will

Life insurance can be a major part of anyone’s estate. Maybe you have a substantial policy that’s going to pay $1 million to your family when you pass away. Your plan may be to divide that money between your primary beneficiaries, such as your adult children.

You might think that the only step you need to take is writing in your will that these beneficiaries should split the money equally. By doing this, you may assume the estate executor will follow these instructions and divide the financial assets appropriately. But it’s not that simple.

Life insurance avoids probate

The key to remember is that a life insurance policy isn’t part of your estate in the same way as other financial assets. As soon as you pass away, the life insurance company will pay the beneficiary you named in your beneficiary designation. This means the money isn’t subject to the instructions in your will. The beneficiary designation is what determines how the payout is distributed, so you would need to name multiple beneficiaries for the payment to be divided.

Using a trust for distribution

There are other ways you can use your estate plan to address life insurance. For instance, your beneficiary doesn’t have to be a person—it could be a trust. You could draft documents for the trust, instructing the trustee to divide the money according to your wishes. When you pass away, the trust is funded by the life insurance payout, and the trustee handles the division on your behalf.

As you can see, handling life insurance in your estate plan may be different than you assumed and slightly more complicated. This is why it’s so important to understand the proper legal steps to take when setting up an estate plan. Contact us online or call today for a free consultation with Pennington Law, PLLC.