Death is a given. Therefore, planning for your loved ones’ after-death circumstances with a life insurance policy is crucial.
Many people believe that a will controls the distribution of life insurance benefits, which is a common misconception. The truth is that life insurance policies stand alone.
Read on to learn what a life insurance policy is, how it operates, and whether you should mention it in a will.
What is a will?
A will is a legal document that outlines the distribution of a person’s assets after death. The document aids in ensuring that your last wishes are carried out. A will is also called a “last will and testament.”
A will allows you to name an executor (person to carry out your wishes), name guardians for minor children, provide for pets, and arrange for the transfer of property or money.
A county probate court reads a will after your death to ensure your wishes are carried out properly.
What is a life insurance policy?
Now that you understand what a will is, let’s discuss what life insurance is. A life insurance policy is a contract between an individual and an insurance company. The policyholder pays a premium to the insurer, and in return, the insurer promises to pay a lump sum of money to the policy’s beneficiaries upon the policyholder’s death. This lump sum payment is called a death benefit and is typically tax-free.
There are two main types of life insurance policies: term life insurance and permanent life insurance.
Term life insurance: Term life insurance provides coverage for a specified period, such as 10, 20, or 30 years. It is the purest form of life insurance. It is a contract between the life insurance company and the insured for a specified period of time.
Term life insurance typically costs less than a whole-life policy. If you die during the term and the policy is in force (premiums are paid on time), the death benefit will be paid directly to your beneficiary. This benefit is typically tax-free and can be used for any legal purpose.
Permanent life insurance: On the other hand, permanent life (also called whole life) insurance provides coverage for the policyholder’s entire life. This type of policy typically carries higher premiums. They also offer a fixed death benefit for the life of the insured and accumulate a cash value. You can access the cash value of the policy during your lifetime.
There are various types of permanent life insurance, such as universal, variable, indexed universal, and indexed variable universal, all with their own unique features.
Can a will mention a life insurance policy?
As we previously stated, life insurance policies do not need to be referenced in a will. This is because an insurance policy on a person’s life is a contract between the insured and the insurance provider. The recipient and the manner of payment of the death benefit will be determined in accordance with the conditions of the life insurance contract.
It’s crucial to remember that you can always modify the beneficiary on your life insurance policy. This ensures that you can modify your policy to guarantee that the appropriate individual receives the death benefit if your circumstances change, such as getting married or having a kid.
The bottom line
A life insurance policy is a separate contract between an individual and an insurance company, and it doesn’t need to be included in a will. The policyholder chooses a beneficiary who will receive the death benefit upon the policyholder’s death.
Having a life insurance policy in place and updating your beneficiary as your circumstances change is important. While a will is equally important, it’s not the only document you must consider when planning for your family’s future.