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Northwest Arkansas Estate Planning Attorneys (479) 443-0062

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Did you Know These Five Things About Life Insurance?

November 30, 2011 by Deb Sexton Leave a Comment

Life insurance is a complex area, and there are five things that often surprise clients when it comes to life insurance and estate planning:

1.         The proceeds of a life insurance policy normally avoid probate.

The proceeds of a life insurance policy pass to a named beneficiary outside of a Will.  The life insurance benefit does not normally go through probate, unless the estate itself is the beneficiary.

2          Life insurance can be used to pay funeral expenses.

Many think of life insurance as being a replacement for income if a family’s ‘bread winner’ passes away, but there are several other roles it can play in an estate plan.  A policy can be ‘earmarked’ to have the proceeds used to pay for funeral expenses – even estate taxes or estate administration costs.

3.         The proceeds of a life insurance policy are not normally taxable to the beneficiary.

Normally, a beneficiary will not have to declare the proceeds of a life insurance policy as income.

4.         A Trust can be created to own a life insurance policy.

An ILIT is an Irrevocable Life Insurance Trust, and it is a holding device that owns your life insurance policy for you, removing it from your estate. As its name suggests, the ILIT is irrevocable, so  once you’ve created it and funded it with an insurance policy, you can’t take the policy back in your own name. But you can closely control many other aspects of the ILIT, and it may remove the policy from your estate for estate tax purposes.

5.         A life insurance policy that names a special needs child as a beneficiary can cause a major issue with any public benefits they may be eligible for.

An inheritance as little as $2,000 may interrupt the benefits of a special needs child – you should work with an estate planning attorney to use another method, such as a special needs trust, to meet their needs.

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Deb Sexton
Latest posts by Deb Sexton (see all)
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