What's the difference between a life insurance policy vs. a will?

How does a life insurance policy work?

A life insurance policy pays out a predetermined amount of money to your beneficiaries, typically your family or other dependents, when you die. The insurer agrees to pay the death benefit provided you have been paying the premiums for the plan and it's still active. Your loved ones can use this money to help replace your income, pay down debt, and save money for the future.

You select a beneficiary or beneficiaries; these are individuals or even organizations you select to receive your death benefit. You can designate individuals, charitable organizations, and trusts as your beneficiaries and how much of the death benefit each will receive. You can also name a contingent beneficiary(ies), who will get the payout if the primary beneficiary dies before the policyholder.

Be sure you inform your beneficiaries that you've selected them as beneficiaries, and provide them with essential information, such as the policy number(s).

All life insurance policies, whether term, whole life, or universal life, allow for beneficiaries. Whole life insurance and universal life provide lifelong coverage that builds cash value, whereas a term life policy only provides a death benefit and is active for a set amount of time.

You should periodically review your life insurance policy and beneficiaries and make any updates if needed.

How does a will work?

A will is a legal document that outlines how you want your assets and property distributed upon your death. An attorney will often help draft a will, but there are also do-it-yourself resources. Assets and property detailed in a will can be considered tangible (physical, you can touch it) or intangible (you can't touch it).

Tangible property includes:

• Real estate, such as your house
• Cars, boats, motorcycles, other vehicles
• Collectible items, such as artwork
• Jewelry and family heirlooms

Intangible property includes:

• Bank and retirement accounts
• Stocks, bonds, and other securities
• Other assets you can't touch, but they hold value

It's important that you select a trusted executor, who will be responsible for distributing your assets upon your death. An executor can be a person such as a family lawyer, accountant, trusted friend, or a family member. It can also be an institution, such as a bank or trust company.

What is probate?

Probate is a legal process used to determine where a deceased person's assets go, whether it's cash, real estate, or possessions. If the person who died had a will, probate administers their assets according to the will. If they didn't have a will, a judge decides how to administer the estate. Life insurance proceeds typically bypass the deceased person’s estate, so life insurance beneficiaries generally can receive a death benefit without going through probate.

Does a will supersede a life insurance beneficiary?

No, a will won't supersede the beneficiaries listed on a life insurance policy so long as the beneficiaries are alive. In most cases, the beneficiary listed on the life insurance policy has the right to claim the payout regardless of the instructions in the will. It's also a good idea to name a contingent beneficiary on your insurance policy if your primary beneficiary for some reason doesn't accept the payout.

Can a will change a life insurance beneficiary?

In most cases, a will can't change a life insurance beneficiary. Typically, the life insurance is paid almost immediately upon the confirmation of death. However, it generally takes more time for a will to make its way through probate court.

The beneficiary on a life insurance policy can be one person or entity, or it can be several. The same is true for the beneficiary of an estate, as is laid out in the will. While they use the same term, the beneficiary for a life insurance policy and the beneficiary for a will are very different.

There are situations where a will can change a life insurance beneficiary. If your life insurance beneficiaries predecease you, including any contingent beneficiaries, the insurance payout will go to your estate. In that case, the beneficiaries of your will receive the money following the terms of your will. Consult with your financial or estate planning advisor if you have questions.

There are clearly benefits for having both life insurance and a will in an estate plan. Life insurance provides financial protection for your beneficiaries; a will facilitates the proper distribution of your assets.

How to get life insurance