Life Insurance vs Will: Choosing the Right Protection for Your Future

Some say you don’t need a will if you have life insurance while some others say if you have both, you can change your life insurance beneficiary through your will. 

Guess what? 

Both are wrong. It seems when it comes to using life insurance and a will together in an estate plan, there are many misconceptions. 

Not anymore. 

This post tells you everything you need to know about how life insurance and will interact, and why, if you are like most people, you probably need both. 

What is Life Insurance?

Life insurance acts as a financial safety net for your family. You pay premiums monthly or annually and in return the insurance carrier promises to pay out a certain sum of money to your beneficiary if you pass away while your policy is in force. The goal here is to provide financial protection to your dependents so that they won’t have to worry about money after you’re gone. But there's also the question of when to buy it, and at what age is it most beneficial?

The life insurance payout is usually not taxable, and the beneficiary has the freedom to use it in any way they choose. Your surviving spouse or partner can use the payout to cover expenses such as: 

• Funeral costs
• End-of-life medical bills
• Mortgage payments 
• Child care and education costs
• Everyday living expenses
• Other financial obligations

Two main types of life insurance policies are term life and permanent life. 

Term life insurance covers you for a limited period, like 5, 10, or 20 years. Once this period is over, your coverage ends, unless you renew it. For most people, term life insurance is a good fit since it is affordable and provides life insurance cover for only as long as you need it. 

Permanent life insurance, in contrast, has no expiry date. You get life insurance protection for as long as you live or want it. Apart from replacing your income when you die, most permanent life plans build cash value. Think of it as a savings component built into your policy that grows over time on a tax-deferred basis. 

You can tap into your cash value by making withdrawals or borrowing against it. However, the cash value feature and lifetime coverage come at a cost. On average, permanent life plans are five to 10 times more expensive than term life. Whole life is the most common type of permanent life insurance.

What is a Will?

A will is a legal document that lets you decide what happens to your money, possessions, and property after your death. You can also appoint a guardian for your minor children and specify your funeral wishes. 

Creating a will is a simple and straightforward process. In Canada, you can write your will yourself. You don’t need a lawyer or notary to make it legal. Just make sure your instructions are clear, and the document is signed by you and two witnesses. 

Your will should include information about: 

• Assets: Ideally, you should include all your assets, such as property, savings and investments, and vehicles, in your will. 
• Beneficiary: Someone who receives part or all of your estate — the collective sum of your net’s worth, including all property, possessions, and other assets — following your death.
• Executor: The person who’s legally responsible for carrying out your wishes and handling your estate. 
• Guardian: The person who’s legally responsible for looking after your minor children until they reach the age of majority. 
• Funeral wishes: Specifying your funeral wishes in the will can spare your loved ones the burden of making tough decisions amid their grief. However, keep in mind that funeral wishes expressed in a will are not legally binding because your body is not a part of your estate. 

The importance of making a will cannot be overstated. It gives you the ability to choose how your assets are distributed and who will take care of your children. If you die without a will, the court will get to decide these things and who’s to say its decision will align with your wishes?

Relationship Between Life Insurance and Wills

Both life insurance and wills serve as essential tools for post-mortem planning. However, they function in different ways and adhere to distinct regulations. Each can function autonomously, so having both offers you greater control over the distribution of your assets. 

Is life insurance part of an estate after death? 

Life insurance payouts do not generally form part of the deceased’s estate. However, there are some exceptions. 

When is life insurance not part of an estate? 

If you name someone other than your estate as the beneficiary  — a spouse, children, or grandchildren — then the life insurance payout is not regarded as an estate asset. This means the death benefit will go directly to the named beneficiary or beneficiaries. 

When is life insurance part of an estate? 

In the following scenarios, life insurance payouts will become part of the estate assets: 

• You name your estate as the beneficiary of your life insurance policy
• The primary beneficiary predeceases you and there’s no secondary beneficiary
• You didn’t name a beneficiary

Do you need a will if you have life insurance?

When the talk is on life insurance vs will, this is one question that crops up frequently. The answer is: yes, you do need a will even if you have life insurance. The life insurance payout replaces your income, but it cannot help with the distribution of assets after your death.

Dying without a will, known as dying intestate, can result in a significantly longer and more expensive process for closing your estate. Your state will appoint an administrator, who is paid from your estate, and it could take years to wind everything up. What’s more, dying without a will can, and often does, lead to legal disputes among family members. You can save your family all the trouble and ensure estate matters are settled quickly after you’re gone by making a will. 

Life insurance can give you peace of mind, knowing your family will be financially secure even if the worst happens, but it doesn’t replace a will. To make sure your money and other assets are inherited by people you want to benefit, you need a will. 

Life Insurance Beneficiary vs. Will Beneficiary

Here’s the rule of thumb: If you want your life insurance proceeds to go to a specific person, you must name them as beneficiary in the policy. Your will, on the other hand, decides who gets what from your estate. Let me break it down with an example: 

Meet Jonathan, a 60-year-old male with a wife named Margaret and has two adult kids, Alicia and Steve. He wants his wife to inherit his entire estate, while his life insurance money will be split between the children. So, he makes Margaret the beneficiary of his estate in the will and names Alicia and Steve as primary beneficiaries in his life insurance policy. This way, he’s making sure all three of his loved ones get something after he’s gone. 

What happens if my will and life insurance policy conflict? 

If you name one person as a beneficiary in your life insurance policy and a different person in your will to receive the death benefit, your policy will take precedence. In other words, a will cannot override a beneficiary on a life insurance policy.  

Continuing with our example, after Jonathan dies, his wife will inherit his property, possessions and the money in the bank, while the life insurance proceeds will go to his two children. Even if Jonathan mistakenly designates Margaret as the beneficiary of his life insurance policy in his will, the insurer will honor the insurance contract and pay the death benefit to the designated beneficiaries — Alicia and Steve. 

Who needs life insurance and who needs a will? 

Anyone who owns a property or has savings and investments should make a will. Life insurance, in contrast, is a must-have if you have dependents or debts to cover. 

Listed below are specific scenarios where we’d recommend either of them. 

When does buying life insurance make sense? 

You are a good candidate for life insurance if: 

• You’re married: The death benefit can help your surviving spouse or partner maintain the lifestyle they’ve become accustomed to. 
• You’ve young children: Without financial support, your spouse may struggle to keep the family financially afloat. The death benefit can help pay for household bills, mortgage installments, child care, tuition fees, and other expenses. 
• You’ve got a mortgage: Should you pass away before paying off the mortgage, your family may have to pay mortgage installments or be forced to sell the house to repay the loan balance. Life insurance is a simple, cost-effective way to ensure your home’s protected, even if you’re not around. 
• You want to leave money to charity: Leaving your life insurance death benefit to a charity is an excellent way to support your favorite causes. 
• You want to cover end-of-life expenses: The death benefit can help the people you leave behind pay for funeral costs and end-of-life medical expenses. 
• You’re a small business owner: Life insurance for small business owners provides financial protection to both your family and business in the face of adversity. 

Life insurance is an important financial tool for pretty much everyone. The only situations it may not be worth considering are: 

• You’re single and have no dependents
• Your spouse or partner earns enough to support the family alone
• You don’t have any debt and have enough money parked in the bank to take care of your dependents 

When is writing a will a good idea? 

We all need a will. For sure, it’s not the most fun topic, but it’s important to plan about what happens to your assets, among other things, after you pass away. 

Here are some reasons why making a will is necessary: 

• It gives you control: A will allows you to choose who will manage the distribution of your assets, who will look after your children if they are minor, who will receive an inheritance, and what they will get. 
• It makes the probate process way smoother and shorter: If you have complicated family dynamics, not leaving a will may lead to property disputes, which may go on for years. We’re sure you don’t want that to be your lasting memory. So, do yourself and your loved ones a favor, and get that will sorted out. It’s like a blueprint for your family to follow when you’re no longer around to guide them. 
• It lets you make gifts: A will lets you leave behind special items to specific people — like passing down your vintage car or prized book collection. 
• It allows you to protect your partner: If you don’t write a will, your unmarried partner may not be entitled to anything from your estate. Setting up a will ensures your partner will get their fair share of your assets. 

Do life insurance payouts go through probate?

The quick answer: no, if the death benefit is paid to someone other than the deceased’s estate (which happens in most cases) and yes, if the payout goes to the estate. 

Probate is the legal process in which a probate court reviews a will to establish its validity. Only after receiving a Grant of Probate (meaning the will is valid) can the executor go ahead with the distribution of the estate assets. 

When the life insurance death benefit is paid to the deceased’s estate, it becomes part of their estate and hence must pass through probate. Keeping life insurance out of probate is a smart move in all situations because otherwise:  

• Your loved ones may receive far less money. Probate costs money, which is paid out of your estate. Probate expenses vary from one province to another, but they can be as high as 1.5% of the estate’s gross value over $50,000. If your policy’s sum assured is paid to your estate, it will increase its total value, leading to higher probate fees. What’s more, the death benefit could be used to pay your debts, leaving a much smaller payout for your loved ones. In contrast, if you nominate a policy beneficiary (like a spouse or child), life insurance is off-limits to creditors seeking repayment. 
•  Others will be privy to information regarding your policy. Once probate is issued, your will would then become a public document. Anyone can view the details of your will, including the size of the life insurance policy payout, the names of policy beneficiaries, and the amount each of them received.
• Your policy beneficiary will not receive the death benefit immediately: The probate process can take anywhere between 6 to 12 months. If there are challenges to the will, the processing time can be even longer. Not receiving the death benefit immediately may put your family under financial stress, especially if they’re counting on that money to pay for your end-of-life expenses and other major expenses.  

How Does a Life Insurance Policy Work With a Will?

Just because your life insurance policy has its own beneficiary doesn’t mean it plays no role in your estate planning. 

Think about it: If you’ve got a $2 million permanent life policy and your spouse is its sole beneficiary, you know they’re taken care of if something happens to you. This knowledge can change how you approach your will. For example, you might feel more comfortable about leaving your secondary home and a good chunk of your savings and investments for your kids. 

How you want to distribute your belongings is entirely up to you, but don’t forget to have a frank chat with your family members. Also, get both life insurance and the will sorted out quickly, if you haven’t already done so. 

Conclusion

Life insurance and will are two different financial tools. Most people require both. Creating a will is simple and easy, but the same cannot be said about buying life insurance. With so many options available in the market and premium rates varying from one provider to another, getting the right policy at the lowest possible price may seem a tough ask.

This is where Dundas Life can help you. We can match you with the best insurance carriers for your situation to help you secure the best deal. Book a free call with one of our advisors today.

FAQs

What if My Life Insurance Policy Contradicts My Will?

A life insurance policy and will are separate legal documents. If they contradict each other, the life insurance policy will take precedence over the will. This means the person named as the beneficiary in your policy will receive the insurance proceeds, not the person named in your will as the beneficiary of your life insurance policy. 

Can you use a will to change a life insurance policy beneficiary?

No, you cannot use a will to change the beneficiary of your policy. These two are separate documents. For this reason, it’s a smart idea to review and update your policy beneficiary designations from time to time, especially after a major life event, such as marriage, divorce, or birth of a child. 

Do I need both life insurance and will?

Everyone needs a will — there’s no two ways about it. As far as life insurance is concerned, you probably need it if you are married and have kids, even if you’re a homemaker. 

Is it necessary to include life insurance in your will? 

No, it isn’t. The only way to control who gets the life insurance payout from a policy is to name a beneficiary in the policy. If you don’t name a beneficiary, or if the beneficiary dies first and you forget to update the beneficiary designation, the death benefit will go to your estate.