Life Insurance and Estate Planning: Protecting Your Beneficiaries’ Interests

A common misconception people have about life insurance is that they only need to designate their spouse, child, or loved one as the policy’s beneficiary to ensure that the life insurance benefits will be available to the beneficiary when they die. Life insurance is a significant financial and estate planning tool. Still, there is no guarantee that your beneficiary will receive or keep the benefit from your insurance without certain protections in place.

Example 1

David identified his wife, Betsy, as the beneficiary of his life insurance policy. At David’s death, Betsy does receive the death benefit from the insurance policy. Still, when Betsy remarries, she adds her new husband’s name as a joint owner of the bank account where she deposited the death benefit. In so doing, she inadvertently leaves the entire death benefit from David’s life insurance to her new husband instead of to the children she and David shared, as they had discussed before his death and as indicated in her will.

Example 2

Dawn, a single mother, named her ten-year-old son Mark as a beneficiary of her life insurance. She passes away when he is twelve. The court designates a relative as a guardian (sometimes referred to as a conservator) for Mark until he is legally an adult. By the time Mark reaches his eighteenth birthday, his inheritance has been partially spent on court costs, attorney’s fees, and guardian’s fees. In addition, its value has not kept pace with inflation because of the limited investment options available to guardians. Dawn had hoped that the life insurance proceeds would be open to pay for Mark’s college expenses, but there is less money available to Mark because of the costs and lack of investment flexibility. Mark receives the remaining funds, spends them frivolously, and has nothing left within a year or two.

Name a Trust as the Beneficiary of Your Life Insurance

A common method for leaving money and property to loved ones in an estate plan is by titling assets, so they are owned by the trust or making the trust the beneficiary of the account or property, with a spouse or child as the trust’s beneficiaries. The same approach may also be used for life insurance policy proceeds. Two popular ways to achieve this result are naming a revocable living trust as a beneficiary and setting up an irrevocable life insurance trust.

Revocable Living Trust

For individuals with accounts and property valued below the current lifetime estate tax exemption amount or who have already set up a trust, naming a revocable living trust as the beneficiary of a life insurance policy can be a helpful option. Doing so simply adds the death benefit from the life insurance policy to what you already have in trust, payable only to the trust’s beneficiaries according to the instructions already in the trust agreement. The benefit of this approach is that it instantly coordinates your life insurance proceeds with the rest of your estate plan.

Irrevocable Life Insurance Trust

An irrevocable life insurance trust is an added layer of protection because it can own the life insurance policy and be named the beneficiary. You can create an irrevocable life insurance trust by transferring ownership of an existing policy into the trust or purchasing a new policy. You make cash gifts to the trust to pay the insurance premiums using your annual gift tax exclusion. Upon your death, the trust receives the death benefit, and the trustee distributes the money according to the instructions in the trust document. This strategy also allows you to remove the value of the life insurance policy and the death benefit from your taxable estate.

Despite the estate tax exemption currently being at a historic high, the exemption amount will likely change under the current administration or sunset in 2026 at the latest. Therefore, if you have purchased life insurance, consider taking the extra step to ensure that your loved ones’ financial futures are secure.

At Cheever Law, APC, we don’t just draft documents; we ensure you make informed and empowered decisions about life and death for yourself and the people you love, which starts at a valuable and educational Family Wealth Planning Session. The Family Wealth Planning Session will allow you to get more financially organized than you’ve ever been before and make all the best choices for the people you love. If you have already completed your estate plan, we will review that plan at your Life & Legacy Planning Session (aka Family Wealth Planning Session) to ensure that it will work the way you intend and address any holes or gaps that may be present if circumstances have changed since you executed your plan.   

To learn more about our one-of-a-kind systems and services, contact us or schedule a 15-minute introductory call today.