A last will and testament and a life insurance policy are necessary parts of your estate plan; they can both help your loved ones after you die, by providing for them with the resources they need to pay their expenses.
Life insurance pays a death benefit to any person or organization you name as a beneficiary on your policy. Your last will and testament distributes the assets in your estate to the beneficiaries you name in the will. In both cases, the beneficiary can be a trust, which owns the asset until the beneficiaries of the trust are allowed to access it.
Can you use your will to distribute a life insurance death benefit?
You shouldn’t include a life insurance policy in your will, since it can be distributed separately.
A life insurance policy allows you to designate a beneficiary and it is payable on death. That means your life insurance beneficiary will receive the proceeds directly from the insurance company after you die. The money never goes to you, the policyholder, so it wouldn’t be distributed as part of your will.
If you have life insurance, that doesn’t mean you should skip out in getting a will. You still need a will to pass on your personal possessions and to name a guardian who will take care of your minor children when you die.
Does your life insurance need to have the same beneficiary as your will?
Your will and your life insurance beneficiary don’t need to be the same person, though many people choose to (especially if their beneficiary is a spouse or child).
Both wills and life insurance policies allow you to name multiple beneficiaries, as well as primary and contingent beneficiaries. (Primary beneficiaries receive assets or the payout first, and contingent beneficiaries get paid if the primary beneficiaries are no longer alive or can't be located.)
Life insurance beneficiaries and will beneficiaries (and the terms of a will in general), can usually be changed. Just keep in mind that updating one doesn’t update the other, since they operate independently as two parts of your estate plan.
Is life insurance part of your estate?
Your estate refers to the collection of everything you own. When you write a will, you’re creating a legal document that distributes the assets in your estate, and after you die the estate may need to go through a legal process called probate before that can happen.
The life insurance death benefit isn’t intended to be part of your estate because it’s payable on death — it goes directly to the beneficiaries named in your policy when you die, avoiding the probate process.
However, life insurance proceeds are considered part of an estate for tax purposes. That means the value of the death benefit is included in the valuation of your estate, and if it’s over the estate tax exemption ($13.61 million in 2024), estate taxes may be due.
Estate taxes will ultimately decrease the size of an inheritance your beneficiaries receive, but proper estate planning with a trust can help avoid it. We’ll discuss that more next.
When life insurance does go through probate
Life insurance becomes part of your estate if your named beneficiaries have predeceased you, at which point it may also need to go through probate.
The death benefit will be distributed according to your will and the beneficiaries named in it, if you have one. If you die without a will, then the court will step in to determine who inherits your estate, including the life insurance proceeds.
It’s generally better to specify beneficiaries and contingent beneficiaries in your life insurance policy than to have your policy pay out to your estate. When life insurance becomes part of your estate, your creditors may be able to make a claim on the death benefit payout.
Having the life insurance proceeds become part of the estate could also impact probate costs and have tax implications: having more assets in your estate could result in higher filing fees if they’re charged at a percentage of your estate. For that reason, you should always keep your life insurance beneficiaries up to date to make sure that the death benefit doesn’t become part of the estate when you die.
Putting life insurance in a trust
One benefit of a trust is that it allows you more control over how the assets in it are used. You can have the money distributed over time as a trust fund, or only have the trustee disburse money only under certain conditions or purposes (e.g., housing or education).
Life insurance proceeds are typically paid all at once to the named beneficiary, after which you have no say over how the money is spent. However, if you have a living trust you can direct the life insurance death benefit to be paid to the trust, and then distributed to the trust beneficiaries. This helps to prevent the life insurance proceeds from becoming part of the probate estate and allows you to manage how the funds are used from beyond the grave. The trustee will make sure the trust beneficiaries get the proceeds according to your terms.
Many people choose to set up a trust for a minor child so it can hold onto assets, or a large sum of money, until they reach a specific age. You can even limit the amount of money they receive, which can be handy if you’re worried about their spending habits.
Irrevocable life insurance trust
Certain types of trusts, irrevocable trusts, can also provide you with asset protection or tax advantages, and they can be useful in conjunction with life insurance. While the federal estate tax threshold is in the millions, some states charge their own estate tax and their limits can be much lower. For example, in Massachusetts and Oregon the limit is just $1 million, and a life insurance policy could be sufficient to put you over that limit.
You can avoid estate taxes on life insurance if you are neither the owner or beneficiary of the policy. Making sure you are not the beneficiary of the policy is simply a matter of designating beneficiaries other than your estate. But making sure you're not the policy owner can be more complicated.
That’s where an irrevocable life insurance trust (ILIT) comes in. The trust owns the policy and is also the life insurance beneficiary. ILITs can be complicated, though, since they aren’t easily revoked. They may also be costly to maintain and setting one up usually requires the help of an estate attorney so they may not be appropriate for everyone.