If you have life insurance or plan to buy some, then you should definitely discuss it with your estate planning attorney. Whether you have the payout on the policy go directly to an individual beneficiary, to your estate, or to a trust, life insurance plays a significant role in the planning process in the big picture, and it needs to be coordinated with your overall estate plan.

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First of all, it’s good to know that life insurance does not get taxed as income, no matter who or what receives the proceeds. However, if the life insurance proceeds go to your estate and pass through your will rather than directly to an individual or a trust, then those proceeds get counted towards the total value of your estate for estate tax considerations. At this point in time (2024) though each person’s estate has an estate tax exemption of over $13 million, so this is a non-issue for like 99% of us.

But there are many other considerations to be had. For example, what if someone thinks there might be some big debts that will need to be paid off by their estate before it is distributed to the beneficiaries. This could be medical bills, business loans, a mortgage on their house, or whatever. A life insurance policy paid to the estate could help take care of those debts and make the executor’s job much easier.

Or perhaps someone has a special needs child, and they want to make sure that child gets as much financial support as possible from their estate after they die. Well, a special needs trust could be set up for that child, and the insurance policy could make this trust the beneficiary that takes all the proceeds from the policy.

Here’s another example. What if someone wanted to divide their estate up in a certain way, perhaps equally between their children, and they have a child from a previous relationship. They should reconsider any idea they may have in regards to making their current spouse the beneficiary of their life insurance policy. Because if that person were to die before their spouse, then the life insurance would of course get paid out directly to the surviving spouse. That surviving spouse is not required to evenly share those proceeds with all the children, and many times in ‘real life’ that surviving spouse doesn’t do so, even if he or she verbally said they would.

Life insurance can be a terrific estate planning tool. You just need to make sure to use it wisely.