A life insurance policy is an excellent way to leave financial assets to your family. If you pass away, you can provide them with financial security. Many people purchase life insurance policies when they become new parents. Even if the policy isn’t needed for decades, it provides peace of mind.
Let’s say you bought your policy when your first child was born. Since then, you’ve had two more children. Ideally, you’d like all three children to share the life insurance payout equally. As you create your estate plan, is this something you should specify in your will?
Beneficiary designations
In most cases, the answer is no. Your will does not divide a life insurance policy, and the insurance company typically will not consider your estate plan. This is because life insurance policies are governed by beneficiary designations made when the policy is purchased. If you named your first child as the beneficiary, for example, the insurance company would pay the entire policy balance to them when you pass away.
This payout bypasses probate and does not become part of your estate. Even if your will states that all three children should split the payout, only the named beneficiary is legally entitled to it.
How to address this
To ensure all your children benefit from the policy, you have a few options:
- Update your beneficiary designations: You can name all three children as equal beneficiaries directly with the insurance company.
- Set up a trust: Name the trust as the policy’s beneficiary and designate a trustee to distribute the funds equally among your children.
Life insurance policies often involve significant financial assets, so it’s crucial to handle them carefully. Take the time to explore your legal options and ensure your wishes are followed.