Monday, November 3, 2014

Probate Avoidance Topic #5: Life Insurance

Courtesy of NARA
This is topic #5 in this series on strategies to avoid the court-supervised probate process.  Previously in this series, I have provided an overview of the probate process, discussed how to avoid probate by using a living trust, explained how to use joint ownership and death beneficiaries, and most recently discussed lifetime giving as a probate-avoidance strategy.

Today's post will describe life insurance, one of the oldest, most flexible, and widely-used estate planning tools.  Unfortunately, many internet resources discussing life insurance and estate planning have a laser-like focus on one topic:  Using an irrevocable life insurance trust to avoid federal estate tax.  However, federal estate tax only applies to estates above $5.34 million this year ($10.68 million per couple).  For many families  below this threshold, these internet resources may be confusing and irrelevant.  This post explains some of the more fundamental aspects of life insurance as an estate planning tool:

Life Insurance Basics

The biggest benefit of life insurance is that you can adjust your coverage to your family's needs over time.  For example, I have a spouse and three young children.  If I were to die today, my family would need enough money for many years of food, housing, clothing, college expenses, etc.  At this point in my life, a large policy makes sense.  As the years go by, and my children begin their own careers, I can gradually decrease the value of my insurance policy and reallocate the money I was spending on life insurance to something else.

Think of a life insurance policy as a well-tailored plan to make sure your loved ones receive the amount of money they would need to survive at a given point in time, in the event of your death.  Contrast this to relying on a will or living trust alone, with no life insurance.  If I declined to buy health insurance, and simply relied on a will as my sole estate plan, I would be gambling on my children's future.  The gamble could pay off:  If I died late in life and wealthier than I am now, my children might end up with a large sum of money at a time when they are already self-sufficient (a windfall).  But if I died now, when my children are not yet self-supporting, my will may not provide sufficient enough funds to comfortably raise them (my kids pay for my gamble).

In previous generations, people sometimes advised that life insurance was only necessary for parents earning money outside the house, and that coverage was unnecessary for spouses that worked in the house.  I do not believe this advice is sound.  No matter your contribution to a family, whether it be monetary, in the form of raising a family, caring for a sick relative, or keeping a house, rest assured that it would be very expensive to even begin to replace your most basic contributions to the family if you were suddenly gone.  With few exceptions, parents should have life insurance, period.

Probate Avoidance Benefits

In addition to the benefit of protecting your family financially in the event of your early death, life insurance helps your estate avoid probate.  Here is an example:  Imagine you die with $250,000 in a checking account, and your will says that $250,000 should go to your son, a student at the University of Illinois.  During this time, your son (having suddenly lost a source of support) may badly need the money.  Unfortunately, the court-supervised probate process can effectively freeze this money for well over a year, leaving your son suddenly without a source of rent or tuition.  In addition, it may be impossible to move the funds to a higher income-producing account during this period.  And perhaps worst of all, your family may be stuck feeling like they are still dealing with the emotional aftermath of your death in a seemingly endless court process.  In contrast, a life insurance policy is a contract which has nothing to do with probate court.  If you die with a $250,000 life insurance policy, your son applies to receive payment directly from the insurer and completely bypasses the court process.

Additionally, if a sufficient enough proportion of your estate passes through life insurance (or other probate avoidance mechanisms), you may be able to avoid formal probate altogether.  As an example, in Illinois, a probate estate containing under $100,000 and no real estate, and meeting certain other criteria, can be handled through "summary administration."  For example, a Naperville parent, passing enough of her estate through life insurance (and other probate avoidance mechanisms), could avoid probate by shrinking her estate below the threshold and using a small estate affidavit

Important Details about Life Insurance

The following are some additional considerations when using life insurance as a part of your estate plan:
  • Remember that a life insurance policy is a contract, which is separate from what you put in your will.  Therefore, frequently check your life insurance beneficiaries, perhaps setting an annual reminder on your birthday.  Your life insurance policy is counterproductive if the beneficiaries listed on your policy are people you intended to disinherit in your latest will.
  • Make sure your family knows about your life insurance policy, and that you keep your insurance documents in an easy-to-find and secure location.
  • Consider listing your revocable living trust as a life insurance beneficiary, especially if you have minor children.  Doing so can ensure your children are most appropriately provided for after your death.  An attorney can help with this.
  • If you are anywhere near the $5.34 million threshold for federal estate tax, talk to an attorney about irrevocable life insurance trust planning.
Consult an estate planning attorney about the proper role of life insurance in your estate plan.

Published by Ian Holzhauer, Esq. of Nagle Obarski PC in Naperville, IL.  

Note:  The information above is not legal advice and is not the basis of an attorney-client relationship.  If you need assistance, you can hire an attorney to assist you with your individual legal needs. 


  1. In USA, People desire to take insurance with pre medical condition for them its very difficult, but nowadays there are no medical test life insurance provides out in the market. One can consult them for getting no medical life insurance quote!

  2. While purchasing business insurance, you need to consider things like products/services you offer, the customer base, availability of raw materials, whether the product needs new design/method, or any other issue that may potentially be a risk factor for your business.
    Brandon insurance agency

  3. If you have any health insurance plan plans your money goes a lot further. Insurance companies have leverage of members on their plans to make a deal lower fees with doctors.
    Smart Medigap Plans

  4. Thank a lot. You have done excellent job. I enjoyed your blog . Nice efforts
    term life insurance for seniors

  5. Risk assessment involves a thorough inspection of workplace to identify various objects, processes, situations, etc., that may cause harm to the business or people working. official site

  6. Till the end of nineteenth century insurance business was almost entirely in the hands of overseas dashboards

  7. This Section will cover all property other than vessels at your business premises.  flood insurance

  8. Beside this, you should consider the cost of your children's instruction too. This is essential for the eventual fate of your kids.
    compare whole life insurance quotes online

  9. Among one of the finest pieces on the web, rousing in its specificity.
    Life Settlements

  10. Excellent work done by you once again here. This is just the reason why I’ve always liked your work. You have amazing writing skills and you display them in every article. Keep it going! responsive wordpress theme

  11. Exactly, you're very kind of us about comment!. article from about bail

  12. It would not be reasonable in the event that we compliment all the blog compositions yet not the creator. Incredible Work!
    construction accident attorney

  13. Excellent article. Very interesting to read. I really love to read such a nice article. Thanks! keep rocking. accident injury

  14. Every one of the substance you said in post is too great and can be extremely helpful.
    Lifetime Insurance

  15. Best work you have done, this online website is really cool with great facts. MyLife

  16. Your blog provided us with valuable information to work with. Each & every tips of your post are awesome. Thanks a lot for sharing. Keep blogging.. pension saving

  17. In order to boost your insurance payout, you must not sit back and let the insurance adjuster tell you what they will pay. Instead, you need to take an active role or hire someone to act on your behalf. Remember that the insurance adjuster, no matter how nice he is, serves the insurance company whose goal is to make a profit by minimizing losses - including YOUR losses. Property Insurance Claim UK

  18. Nice to be visiting your blog again, it has been months for me. Well this article that i've been waited for so long. I need this article to complete my assignment in the college, and it has same topic with your article. Thanks, great share. travel merchant account

  19. I appreciate everything you have added to my knowledge base.Admiring the time and effort you put into your blog and detailed information you offer.Thanks. Insurance Wooster

  20. Intuit has built up the product with nearly development to deal with all checks and expenses issues. Since nobody is well in this globalization. Much of the time when individuals are dissenting about off base count and defaults paychecks comes about. QuickBooks Payroll Customer Service Number

  21. To provide instant support service, Our Quickbooks Customer Support Number 1800-291-2485 is 24/7 open. This accounting software is mainly developed for inspecting and keep record the data on the basis of quarterly, monthly and yearly. This software is useful for running the business highest in the industry.

  22. Interesting post. I Have Been wondering about this issue. so thanks for posting. Pretty cool post.It 's really very nice and Useful post.Thanks Click here