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How life insurance fits into estate planning

One thing that Florida residents tend to forget about as they engage in estate planning is their debts. Most people focus on what happens to their assets upon death, but addressing any debts left behind is an integral part of the estate administration and probate process.

Like most people, your intention during the estate planning process is to make sure your heirs and beneficiaries receive the maximum amount of benefit from their inheritances. This could make ensuring your bills don't eat away at those assets a priority. Life insurance could help.

If your designated beneficiary outlives you

One way to help ensure that your loved ones receive the resources they need after your death is through a life insurance policy. You could name an individual as the beneficiary of the policy on the beneficiary designation form. If he or she outlives you, the proceeds of the policy go directly to him or her and bypass the probate process completely.

This doesn't resolve what happens to your debts, but it does put money into that person's hands. The law does not expect your beneficiary to pay your bills with those funds. In fact, under most circumstances, your heirs and beneficiaries are not responsible for any debts left unpaid upon your death. As is the case with most rules, there are exceptions, and you may want to consult with an attorney to determine what those would be in your case.

If your designated beneficiary dies before you

You aren't alone if you filled out a beneficiary designation form for your life insurance policy and then forgot about it. If this happens and your designated beneficiary passes away before you do, one of two things will happen:

  • The proceeds of the policy pass directly to your heirs-at-law and are not available to pay your debts.
  • The proceeds of the policy pass directly into your probate estate and are available to pay your debts.

These options also control what happens if you fail to fill out a beneficiary designation form. You will need to do your research to determine which of these options will occur under these circumstances.

If your designated beneficiary is your estate

You could make your estate the beneficiary of your life insurance in order to provide funds to pay your final bills. This could leave other assets available for distribution. The value of the policy adds to the value of the estate for tax purposes, so keep that in mind.

You could make a trust the beneficiary of your estate. This would bypass probate and avoid the possibility that a beneficiary may not outlive you. Moreover, you can avoid leaving a direct inheritance to a minor or someone in your family who is not particularly good with money. It would be wise to consider all of your options before making a final decision.

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