One way to help ensure financial security for your family even after you pass away is to buy a significant life insurance policy. For high earners or wealthy families, life insurance policies could reach into the millions of dollars. These are very significant assets, so it is important to consider exactly how the life insurance policy is going to be paid out.
In some cases, there could be a conflict between the life insurance policy and your estate plan. For instance, say that your will says the life insurance payout should be split between your three adult children. At the same time, however, you only named your eldest child through the life insurance beneficiary designation because they were the only one who had been born at the time you purchased the policy. Who will actually receive that payout?
The beneficiary designation takes precedence
In many cases, when there is this type of conflict, it is the life insurance beneficiary designation that determines how the payout will be made. In this case, your eldest child would likely receive the entire payment.
The reason for this is that the life insurance company is just following the instructions you gave them. They are not concerned with what you wrote in a will at a later date. So they are going to pay your oldest child, and the money never enters your estate. As such, your will does not govern what happens with it.
However, there are cases when the life insurance policy can enter your estate. If you did not name a beneficiary or if the selected beneficiary passed away before you did, for example, the policy will often pay out into your estate. It then gets distributed by your estate plan with the rest of your assets.
It can be complex to ensure that all of these different types of documentation work together. Be sure that you are well aware of how to create an estate plan that addresses your family’s financial future appropriately.
