Life Insurance

I recently spent the afternoon with an elderly woman planning how to distribute her large real estate holdings fairly upon her death.  I asked her how she had accumulated all that property.  She said that her husband had died at fairly young age leaving her with life insurance proceeds.  She used that money to pay off her mortgage and purchase more land.  She worked the land and continued to buy more land as she had the resources to do so.  In contrast, that evening I visited with a  one of the county’s homeless as a volunteer in our church’s outreach to the homeless.  I asked her how she ended up in the shelter.  She said that her husband died and she lost her house as her income was not enough to cover her house payments.  That day made clear to me the lesson of the need for life insurance to protect your family.

Before purchasing a life insurance policy, I would recommend that you contact an attorney to see whether an Irrevocable Life Insurance Trust is right for your situation.  Although life insurance proceeds are exempt from income taxes, the amount is included in your total estate.  An Irrevocable Life Insurance Trust puts the money outside of your estate and in a trust where you specify how the money is used.  As an alternative, your revocable trust or trust setup by a will can be a beneficiary for your life insurance proceeds ensuring that the money is spent according to your wishes.  This is especially critical if you have a life insurance policy setup to take care of your children.  If you already have life insurance, a quick review of the beneficiaries is a prudent step to ensure that the government is not a beneficiary of your insurance.  If your estate is named as the beneficiary of your life insurance policy, as a minimum the cost of probate will be increased by the life insurance amount.  Putting that money in the estate will also allow creditors to make a claim on the life insurance proceeds.  Mistakes in beneficiary designations are becoming more common as life insurance policies are bought on-line or part of a company compensation plan without an insurance agent to advise the policy owner on proper designations.

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