Life Insurance & Estate Planning
Life insurance is a key part of the estate planning process. When a person dies, probate fees to determine the legal validity of a will can become expensive. Life insurance can help to offset these costs, and life insurance can play other roles in the estate planning process.
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Offsetting Probate Fees
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When someone dies, assets such as real estate, bank accounts, and securities have no beneficiary designation, which means that these assets must go through probate before they can be released to the surviving relatives. With life insurance, the policy owner can designate a beneficiary who will receive the money from the policy when the insured person dies. The money from the insurance policy will be paid directly into the hands of the beneficiary, thereby avoiding probate fees on the insurance policy assets.
Accessible Assets
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Since insurance policies have a beneficiary designation, the payment of the death benefit is immediate when the insured person dies. This allows the surviving relatives to have immediate access to assets to cover expenses.
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Debt Payment
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Often when a person dies, certain expenses need to be paid, such as personal loans and mortgage loans. Many times death happens unexpectedly, and a person's surviving relatives are not prepared to pay these expenses. To prevent undue financial hardship on surviving relatives, a person can purchase life insurance for the amount of his loans so that when he dies, his relatives will have the cash needed to pay any outstanding debts.
Final Expenses
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Most often, people buy life insurance to pay for their final expenses. Final expenses can include medical bills as well as funeral expenses, and these expenses can be costly. While a surviving relative can sell the deceased's assets, often these forced sales mean the surviving relative will end up with less cash than what the assets are worth because the assets must be sold quickly. To prevent the forced sale of assets and to provide money to pay for final expenses, a person can purchase a life insurance policy for an amount she estimates will cover those final expenses.
Dependent Support
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When someone who provides income to support his family dies, this can cause financial hardship to the surviving members of the family since household expenses still must be paid. Most people do not have enough money to pay their monthly expenses if the household income is reduced substantially through the death of a family member. Life insurance can meet this need by providing enough money to support the deceased's family until they find new ways to support themselves and maintain the same income level, or it can help support the family while they adjust their expenses and learn to live at a lower income level.
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