What Happens to Your Life Insurance When You Die?

Most people buy life insurance for a simple reason: they want to make sure the people they love are financially protected if something happens to them. They choose a policy, name a beneficiary, pay the premiums, and then often don't think much about it again.

But buying the policy is only part of the planning. There is another important question to consider: What actually happens to the money when you die?

For most life insurance policies, the answer depends largely on the beneficiary designation. And if you haven't looked at yours in a while, it may be worth taking a few minutes to see what it actually says.

Your Will Usually Doesn't Decide Who Gets Your Life Insurance

One of the most common misconceptions I see in estate planning is the assumption that your will controls everything you own when you die. It doesn't. Assets such as life insurance and retirement accounts generally pass according to their beneficiary designations, regardless of what your will says.

For example, suppose your will divides your estate equally among your three children, but a life insurance policy you purchased years ago still names only your oldest child. The insurance company will generally follow the beneficiary designation on the policy, not the instructions in your will. That can produce a very different result from the one you intended.

This is why I spend time reviewing beneficiary designations as part of the estate planning process. A good estate plan isn't just a collection of legal documents. Your will or trust, your assets, and your beneficiary designations all need to work together.

What Happens If You Name a Minor Child?

Parents sometimes name their children directly as beneficiaries of life insurance because, understandably, the children are the people they are trying to protect. The problem is that naming a child tells the insurance company who the money is intended for, but it doesn't necessarily provide a plan for how that money will be managed while the child is young.

An insurance company generally cannot simply hand a large death benefit to a minor. Without appropriate planning in place, some form of court-supervised or state-law arrangement may be needed to manage the money. Eventually, the child may also become entitled to control those funds at an age much younger than the parent would have chosen.

Imagine an 18-year-old who has just lost a parent also becoming responsible for several hundred thousand dollars. Even a very responsible 18-year-old may not be prepared to make those decisions, particularly while grieving.

This is one reason parents sometimes use a trust as part of their estate plan. A trust can allow the parent to choose who will manage the money and provide guidance about how it can be used for the child's education, health, housing and support. It can also allow the money to remain protected and managed beyond the age when the child legally becomes an adult.

What If You Already Have a Trust?

Having a revocable living trust doesn't automatically mean your life insurance proceeds will be paid to the trust. The beneficiary designation on the policy still matters.

Depending on the circumstances, it may make sense to name a spouse or another individual as the primary beneficiary and a trust as the contingent beneficiary. In other situations, a different arrangement may make more sense. There isn't one beneficiary designation that is right for every family, and I don't recommend changing one without first considering how it fits into the rest of the estate plan.

The important point is that creating a trust is only one part of the process. If you want certain assets to be handled through the trust, you also need to make sure those assets and beneficiary designations are properly coordinated with it.

Don't Forget About Your Contingent Beneficiary

Most life insurance policies allow you to name both a primary beneficiary and a contingent beneficiary. Your primary beneficiary is first in line to receive the proceeds, while the contingent beneficiary receives them if the primary beneficiary cannot.

For a married couple, for example, naming a spouse as the primary beneficiary may be an easy decision. But the next question is just as important: What should happen if your spouse dies before you, or if you die together? Your contingent beneficiary designation is where that second layer of planning often happens.

It's easy to overlook because it may feel unlikely that it will ever matter. Estate planning, however, is largely about making sure there is a plan even when events don't happen in the order we expect.

When Was the Last Time You Looked at Your Beneficiaries?

Think about how long ago you purchased your life insurance and what has changed since then. You may have married or divorced, had another child, bought a house, started a business, created a trust, lost a beneficiary, or simply watched your children grow from minors into adults. Your financial circumstances and the needs of your family may be very different today.

Your beneficiary designation doesn't change along with your life. Unless you update it, the choices you made years ago may still be sitting there exactly as you left them.

September is Life Insurance Awareness Month, which makes this a good time to pull out your policy or log into your account and take a look. Check who you have named as your primary and contingent beneficiaries and whether those choices still make sense. If a minor child could receive the proceeds, consider whether you have a plan for who would manage that money. And if you have a trust, make sure you understand whether and how your life insurance is intended to coordinate with it.

I wouldn't recommend changing beneficiary designations simply because something in this article makes you question yours. Beneficiary planning can have legal, financial and tax consequences, and the right designation depends on your individual circumstances. But knowing what your current policy says is a very good place to start.

Life Insurance Is Part of the Estate Plan

Life insurance can provide tremendous financial protection for a family. But the policy itself can't decide how the money should fit into everything else you've planned.

That's where estate planning comes in. The goal is to make sure your legal documents, assets and beneficiary designations work together so that what you intended is actually what happens.

At Evergreen Legacy Law, I help families look at that bigger picture. If you aren't sure how your life insurance fits into your estate plan, or it has simply been a while since you've reviewed everything, you can schedule a complimentary 15-minute discovery call.