Including a life insurance policy within a will’s framework is not recommended, as the asset allocation can be done separately in the former case. Furthermore, life insurance allows you to select beneficiaries of the death benefits, i.e., they receive assets which were never even owned by the policyholder, which is you in this case. Therefore, issuing a separate will ensures your preferred people will enjoy your legacy and the amount entitled to them as death benefits.
Difference between Life Insurance Beneficiary Vs Will
Life insurance contributes towards effective financial planning for your family in your absence. Therefore purchasing one with sufficient coverage is essential to ensure your loved ones can meet their goals and clear off existing liabilities, if any.
Contextually, like you decide the end beneficiaries of a specific asset in a life insurance policy, a will beneficiary is attached, judging a family’s overall financial obligations. Before jumping into the main essence of life insurance beneficiary vs will, let us know the legal consequences of these instruments individually.
What Is a Life Insurance Beneficiary?
A life insurance beneficiary receives death benefits from an insurance company if a policyholder meets an unfortunate demise within the policy term. This beneficiary can be a family member as well as any friend, company or business partner.
However, while selecting a family outsider as beneficiary, the policyholder must present an insurable interest.
As we will be discussing beneficiary vs will in an upcoming section, now let us understand a will beneficiary first to avoid any confusion.
What Is a Will Beneficiary?
What Is the Difference Between Life Insurance Beneficiary and Will Beneficiary?
We have summarised life insurance beneficiary vs will for our readers in this table below:
Point of Difference
Life Insurance Beneficiary
Beneficiaries receive death benefits from the insurance company after the demise of the policyholder.
Beneficiaries receive estate portions of the owner as per the particulars mentioned in the will.
Policyholders have the power to assure coverage for their loved ones in the form of annuity or lump sum payment. Beneficiaries can use this money to clear off existing liabilities and lead their lifestyle without any problem for a few years.
Wills allow selecting the deserving heirs and ensuring your possessions are not passed to unintended beneficiaries.
Death benefits get accredited to all beneficiaries almost immediately after the policyholder’s unfortunate demise.
Beneficiaries receive the assets at a predetermined time as set by the will issuer.
Can a Will Affect Claims of a Life Insurance Beneficiary?
Wills issued by life insurance buyers have nothing to do with death payouts as long as the life insurance beneficiaries are alive. However, in case the primary life insurance beneficiary meets their demise, the contingent beneficiary will receive the death benefits, provided you have mentioned one.
Distribution of assets will be executed as per the will’s statements only if the life insurance holder mentions no contingent beneficiary. Also, in some cases, the life insurance provider does not have the provision of setting a secondary beneficiary. In such cases, the will plays a defining role in specifying the rightful heir.
Do I Need a Will Even After Issuing a Life Insurance?
Yes, a will is essential as it ultimately serves a different purpose. Life insurance takes care of your family members in your absence by providing assured coverage against timely payment of premiums. But it has no role to play in defining the allocation of your estate.
To precisely depict the distribution of possessions, you must get hold of a will. These instruments even allow you to set different beneficiaries; for instance, you may select separate beneficiaries for a life insurance policy that will complement the future financial goals and obligations.
A life insurance policy safeguards your family’s future irrespective of whatever critical situations they may face. Here while discussing life insurance beneficiary vs will, we wanted to reiterate that owning a life insurance policy is not enough. These policies do not assure the rightful heirs enjoy your possessions. Wills are necessary to distribute the estate among intended entities; however, these instruments do not have the power to overwrite life insurance statements.
FAQs About Life Insurance Beneficiary Vs Will
Estate signifies everything a person possesses during his lifetime, whereas life insurance guarantees a lump sum amount as compensation to the policyholder's family. Thus life insurance plans are not part of the estate as they involve registered claimants and not beneficiaries decided per the estate owner's ordinance.
The beneficiaries named on a life insurance policy take precedence over a will. Most of the time, regardless of the directions in the will, the beneficiary named on the life insurance policy has the right to claim the benefit.
Financial advisors recommend setting an adult as a direct beneficiary for life insurance as they can decide how to use the sum wisely. On the other hand, chances are high that if you designate your child as the primary beneficiary, they will not use the money properly for their education or may develop foolish spending habits, ultimately leading to bankruptcy.
Other Important Features of Life Insurance
- This is an informative article provided on 'as is' basis for awareness purpose only and not intended as a professional advice. The content of the article is derived from various open sources across the Internet. Digit Life Insurance is not promoting or recommending any aspect in the article or its correctness. Please verify the information and your requirement before taking any decisions.
- All the figures reflected in the article are for illustrative purposes. The premium for Coverage that one buys depends on various factors including customer requirements, eligibility, age, demography, insurance provider, product, coverage amount, term and other factors
- Tax Benefits, if applicable depend on the Tax Regime opted by the individual and the applicable tax provision. Please consult your Tax consultant before making any decision.