Life Insurance

Your Guide to Life Insurance and Wills

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Life insurance and wills are two important components of a comprehensive financial plan, as both pertain to the wishes for your estate when you're gone. Your will is a legal document that handles your bequests to your heirs and ensures your desires are carried out regarding your property — including money, your home, and other belongings.

The life insurance basics are similar, but all policies are not the same. A life insurance policy is a contract between you and an insurance company to pay a certain amount to someone you designate as your life insurance beneficiary after your death. 

The primary recipients of your will and the beneficiaries of your life insurance policy may be the same people, but they don't have to be. Your will states who gets what from your estate, while life insurance allows you to leave a lump sum to a person, group of people, or organization after you're gone. 

What are beneficiaries?

When mapping out your life insurance and your will, you designate beneficiaries. It can be a single person, multiple people, or even an organization you'd like to support and leave with a legacy gift. 

The beneficiary can also be a trust: an entity managing the funds until your beneficiaries can receive them. This approach is often used for beneficiaries who are still children. 

There are key differences between a life insurance beneficiary vs a will. With life insurance, for example, you can designate primary and contingent beneficiaries. Primary beneficiaries receive the benefit unless they've died or can't be located. In that case, the contingent beneficiary gets the money. 

If both primary and contingent beneficiaries are deceased or absent, only then will your life insurance payout be added to your estate, where it'll become available to the heirs you've designated in your will.

Will vs beneficiary life insurance: Which is better?

Life insurance policies and wills each have pros and cons. One benefit of life insurance is that the payout is collected quickly and efficiently. Most wills are required to go through a process known as probate, which allows the will to be accepted legally as a true last testament for its owner. 

This process takes time and may involve fees. There may also be taxes on a portion of your estate. Since your life insurance isn't part of your will, it doesn't need to go through this process, and your beneficiary can receive the payout soon after your passing. Usually, taxes won't need to be taken out of the payout.

Another difference between life insurance beneficiaries and wills is how easy it can be to set up an online life insurance policy, which doesn't require a lawyer, as do most wills. At Ethos Life, it's simple and easy to apply online and get covered.

You can even calculate the amount of insurance you should purchase to protect your beneficiaries adequately. 

With both term and whole life policies available, you can choose the coverage option that works best for your circumstances.

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Does a will override life insurance beneficiaries?

Can a will change a life insurance beneficiary? The simple answer is no. Life insurance and wills are two different things, and neither takes precedence over the other nor can one bring about changes in the other. They're distributed differently, and unless you've designated the heirs to your will as beneficiaries on your life insurance policy, they'll have no claim on the death benefit of your life insurance policy.

Note, however, that while your will is usually settled once written, your life insurance policy may allow you to change beneficiaries and make other changes during the policy's life. This gives your life insurance policy flexibility that your will lacks. Most policies have revocable beneficiaries, which means that the policy owner can change them as they wish during the policy's life. 

Should my life insurance policy pay into my estate?

In most cases, it's a better idea to name beneficiaries than to have your policy placed with your estate. As we've already noted, your estate may spend a considerable amount of time in the probate process, thus rendering the estate unavailable to your heirs. On the other hand, a life insurance payout can reach your beneficiaries soon after your passing.

In addition, the contents of your estate may be open to claims from creditors, which isn't true for your life insurance payout. In that case, your money will be more adequately protected within the policy than it will be as part of your estate.

You can, if you wish, allow your life insurance benefit to be paid into a trust. This gives you some flexibility in determining how and when the death benefit is paid out. For example, suppose you have minor children. In that case, you can designate that the proceeds of the policy (when placed in a trust) are used only for educational purposes until they reach a certain age that you designate.

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