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Life Insurance Vs Wills: Which One Wins?

Life Insurance

A person dies and their life insurance policy has their sole child as the beneficiary. The will, however, says that all assets are due to be left to their spouse, what happens? The rules are clear and the life insurance payout takes precedence. In this scenario, the payout would go to the stated life insurance beneficiary, the child in this example.

Does my life insurance trump my will?

When you designate a beneficiary on a life insurance agreement, it is a legally binding document and will override anything that a will states. In contrast, a will states a person’s wishes and doesn’t quite have the same level of legal standing. When it comes to life insurance vs will, the life insurance wins.

The only time this isn’t the case is when there is no beneficiary named on the life insurance policy which can be the case if the proposed beneficiary has passed away. In this instance, the proceeds from the life insurance policy will be paid into the estate of the policyholder. The will then controls this estate and where the funds go.

The importance of designating a beneficiary

As we can see here, it’s vitally important that you choose the right beneficiaries and you update them should your situation change. A common error is separating from a partner and then not removing them as a beneficiary. It doesn’t matter what you believed the deceased wishes to be, what happens will be what is stated in black and white.

If you sign into life insurance and/or create a will when you're 40 years old then these documents could be valid for 40/50/60 years. A lot can change over that time and you want your policies to change with your circumstances. While divorce is a common reason that your wishes no longer match your beneficiaries, there can be plenty of other reasons too.

Even if the original beneficiary of the life insurance policy has passed away, you still want to update it instead of it falling into your estate. Life insurance policies will pay out much quicker than any probate application and these funds can be used to cover funeral expenses and bills. They are not liable to any process and as long as you have the death certificate and can prove who you are, you'll receive the payout very quickly.

Stay organized

People can have numerous policies that will state a beneficiary. These can be retirement accounts, annuities or multiple life insurance policies. Collect all of this information together in a binder and review it regularly. A good idea is to Make a document listing all your policies, who the beneficiary is and when they were last reviewed. You can either keep a physical copy of this information or organize it on a computer.

Doing this will not only keep you on top of who is the beneficiary but also it’ll make things a lot easier for your loved ones when you pass away. Updating a beneficiary is usually very simple and it’s also a good idea to list a contingent beneficiary should anything happen to your primary choice. Can a will or life insurance be challenged?

Yes, but only under specific circumstances. You can challenge one of these legal documents if you feel that they were either signed under duress or they were not of sound mind when they were doing so. Examples of this would be if they were signed under the threat of blackmail or amended when suffering the effects of dementia.

You can’t challenge a will or life insurance just because you think it’s unfair. Your parent may have had an estranged marriage but if their ex-partner is still listed as a beneficiary, that’s where the money is going.

Will life insurance form part of the estate?

Not if it's written in trust and nominated to a specific beneficiary. This is one of the huge benefits of life insurance. If it's not written into a trust then the funds can fall into the estate, require a grant of probate and be liable to inheritance tax. If you separate the two properly, then the life insurance policy will have no bearing on the will.

Aligning your will and your life insurance

If you have both a life insurance policy and a will then you need to be clear on how one will affect the other. Any discrepancies or errors could cause plenty of distress and confusion after you’ve passed away. However you want to sort your affairs out before you pass away, it’s important to remember that the life insurance supersedes the will. Make sure they are compatible with each other and there will be no issues after you're gone.

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