“Is estate planning the same as having life insurance?” — Julie H
This is a great question and one that we hear often. The simple answer is no. Estate planning is not the same as having life insurance. However, owning a life insurance policy or having a few different life insurance policies can be one of a variety of tools in your overall estate planning toolbox.
What‘s the Difference Between Life Insurance and Estate Planning?
Life insurance on its own is simply a dollar sum payout to your designated beneficiary. Life insurance is good to have and can provide a sizable financial benefit, depending on the amount and type of insurance policy you purchase. Life insurance is a short-term source of funds. And for the beneficiary who may be faced with other unexpected expenses, the money from a life insurance policy may help pay a mortgage or pay other bills, but eventually, that money will run out. An estate plan considers the implications for all a person’s assets, not just a life insurance policy.
An estate plan is just that — a plan. It goes a step beyond simply naming who the beneficiary will be on a policy, bank account, or life insurance policy. An estate plan spells out precisely how, when, and to whom your assets will be distributed. Your estate plan contains the legal instructions for your estate. It’s a formalization of your wishes and goals so that all your assets are handled the way you would like.
Life Insurance Is Just One Component of Estate Planning
Purchasing life insurance can be a good investment. Certainly, a life insurance payout can be helpful in assisting your beneficiaries with covering the cost of any final expenses, depending on the type of policy you choose. However, without clear instructions indicating exactly how the insurance payout should be managed, you cannot be sure your wishes will be carried out. Additionally, without an estate plan, your beneficiaries may be subject to gift, income, and estate taxes – financial burdens they may not have anticipated.
Your assets. Your decisions. Your plan.
Think of estate planning as a jigsaw puzzle. All the pieces of the puzzle (such as life insurance, Wills, Trusts, bank accounts, mortgages, etc.) are assembled together to create a clear and total picture of your “estate.” An estate plan is also designed to reduce the burden for those that you’ve selected as beneficiaries, guardians, or decision-makers.
Two Examples of How Estate Planning Can Work for You and Your Loved Ones
So, let’s consider things from the perspective of the recipient – the beneficiary. Will the money from a life insurance policy alone help pay for unexpected expenses?
Why Life Insurance Alone Isn’t Enough
Let’s say a husband is named as the beneficiary on a life insurance policy held by his wife. If the wife dies, the husband gets the money. It’s tax-free, and he will receive the policy’s full amount. However, will that money help him to cover expenses he may now face, such as hospital or funeral costs, mortgage and utility payments, credit cards, car payments, and other household or personal debts? Possibly.
If the husband is the primary earner in the household, this may not be an issue, but if the wife was the primary earner, the money from the dollar sum payout from the life insurance policy may only provide temporary assistance. Without an estate plan in place to provide direction for all of the financial assets, the husband may need to go through probate to resolve outstanding expenses. This could lead to additional time, money, and frustration.
Now consider if this household had a comprehensive estate plan, which incorporated the life insurance policy as well as Wills, Trusts, etc. It could detail exactly how you would like your life insurance – as well as anything else you own, such as financial assets, investments, homes, art, jewelry, etc. – to be managed and disbursed.
Ensuring Financial Security for Your Child Through Estate Planning
In another scenario, let’s consider the situation of parents with a 10-year-old child. In the unfortunate event of their death, they want to ensure that there is enough money to take care of their child and also provide financial support for their child’s college education or other higher learning opportunities. However, if all they do is purchase life insurance – without any Will or Trust in place as part of an estate plan – and they name their child as the beneficiary, then the 10-year-old will get that life insurance money at age 18. Despite the parent’s intentions and wishes for their child and their education, the child may or may not use that money wisely when it comes to them as a teenager.
If the child’s parents had created a Will or a Trust as part of their overall estate planning, they’d be able to indicate specific and legal instructions detailing how the life insurance money should be handled. Additionally, they could appoint guardianship or an overseer to ensure the money is managed properly.
Do I Need an Estate Plan?
Many people think they don’t need an estate plan. They may feel as though they don’t have enough assets or enough money to qualify for a so-called estate. Or they may mistakenly associate estate planning with something reserved only for the uber-wealthy. But the truth is, an estate plan is for nearly everyone. No matter how many (or how few) assets you may have, having an estate plan is the best way to ensure your heirs or your designated beneficiaries receive what you would like them to receive either upon your death or if you should become incapacitated in any way.
Additionally, a holistic estate plan can address issues such as critical healthcare decisions, end-of-life care, and more should you become incapacitated or unable to make those decisions for yourself.
The pandemic years are an excellent example of a time when estate plans were essential. So many people were hospitalized quickly and unexpectedly. And many were unable to communicate their wishes for care. With an estate plan in place, you can select people who will advocate for you in advance. People who will fulfill your expressed wishes regarding the type of care you want to receive, including life support and end-of-life care, when you are unable to do so yourself.
The Importance of an Estate Plan
Did you know? Most Americans believe that estate planning is important, but only about one-third of Americans actually have an estate plan.
Estate Planning: Not Just for After Death
It can be difficult and maybe even a little uncomfortable to think about making these kinds of plans. But remember that an estate plan is not just a plan for what happens when you die. An estate plan is for today and the years to come. If you become sick or unable to make your own healthcare decisions, an estate plan can formalize your wishes for a care plan if the need arises.
So perhaps think of an estate plan as another way to take care of those you love. It’s a way of helping to reduce the stress associated with unexpected situations that are a part of life. An estate plan ensures your affairs are in order so that when your dependents or beneficiaries take over, their tax stress levels are reduced, and hopefully, they won’t have to personally pay for your lack of planning.
The Consequences of Not Having an Estate Plan
Here’s one example of how that might play out with elderly parents and adult children:
Consider two aging parents living in one state and their two adult children living in two different states. For the most part, the family gets along just fine. The parents pass away, and they have healthcare bills, outstanding credit card debt, perhaps an auto loan, possibly a mortgage, and a life insurance policy. They have no written Will.
Unless one or both of the adult children are named on the deed, the fate of the parent’s residence would be decided by the courts in that state. With no estate plan in place, the courts would also make decisions about assets and expenses.
This could lead to disagreement between the adult children, unexpected taxes for one or both of them to pay, and possibly even unexpected travel expenses from out of state so they can deal with the courts and the legal system in the state where their parents resided.
Ensuring Peace of Mind and Providing a Legacy for Your Loved Ones
An estate plan is a plan for your future. It’s a plan for your assets, but more importantly, it’s a plan that can help reduce the burden on your loved ones and help you achieve peace of mind, knowing you have made the decisions about how your estate will be handled in the future.
Instead of looking at estate planning as a burden or a negative, think of it as a way of providing for your heirs. Of providing a legacy, however big or small, and leaving a little something good behind.
Effective estate planning provides an explicit legal plan so there is no confusion, and this is what we do best. Our process includes considering financial and legal tools like:
- Financial tools (like life insurance, long-term care insurance, disability insurance, annuities, etc.) and,
- Legal strategies such as Wills, Trusts, and Powers of Attorney
This is why our Wealth Protection Plan process includes a Financial Strategy meeting with your financial advisor. Good estate planning considers all of your finances and assets and then establishes legal instructions to ensure the plan works effectively. Our job is to listen and understand your wishes and intentions for all of your assets and then work with you to create a plan designed to help you achieve those goals.
To continue reading more about life insurance and estate planning, read another Ask the Attorney regarding life insurance for the disabled here. To learn more about Estate Planning basics, check out one of our free workshops.