Life Insurance As an End-of-Life Planning Tool

Upon death, life insurance provides a lump-sum payment, known as a death benefit, to the named beneficiary(s). Term life insurance generally covers a specific period of time, such as 10 or 20 years, while Permanent insurance, such as whole and universal life, provides lifetime coverage.

It is generally not advisable to name your estate as the beneficiary of a life insurance policy. The proceeds paid out would be held in the estate until settled, which could be a lengthy process. The proceeds would also be subject to probate fees and possible tax. A named beneficiary(s) would receive the funds tax free, approximately two weeks after a death certificate is provided.

When you purchase a life insurance policy, your health affects your ability to obtain insurance, and impacts the cost of premiums. Sometimes insurance policies are offered in the mail or on television. By answering a quick list of health questions you become approved for insurance. In other situations, you are asked to fill out multiple sheets of tricky health related questions. These policies are not underwritten at time of application, and people who think they are covered may later have their claim denied. Make sure your policy is “underwritten at time of application”. The insurance company does a thorough review of your medical records and health conditions, and once approved they cannot deny your policy later.

If your life insurance policy is for a 10 or 20 year term, it can be converted prior to expiry to a Permanent Policy without undergoing medical underwriting.

A life insurance policy is especially helpful in the following situations:

  • To ensure your dependents are taken care of in the event of your death.
  • To provide quick cash to your executor as the named beneficiary. Once a death certificate is produced the proceeds of a life insurance policy will be paid out in approximately two weeks. The funds could be used to pay for funeral expenses, the probate fee, the amount owing on the final tax return, debts, additional insurance on an unoccupied house, and ongoing household expenses. This way the estate can remain intact, and the executor is not forced to sell assets in an untimely way. This assumes a high level of trust between you and your executor, who could also be a beneficiary.
  • It may not be possible to divide your assets equally among the parties named in your will. A life insurance policy may provide you with an alternative option to give equally to all, keeping the assets intact.
  • A probated will becomes a public document. Wills can be contested if deemed unfair by your spouse or children. If you would like to give money privately, an insurance policy is one way to do this. There may be compelling reasons to distribute your estate unevenly, without making this public knowledge.
  • To protect the interests of your beneficiary(s). When the named beneficiary is a spouse, parent, child, or grandchild, the insurance proceeds are not normally considered an asset of the estate. Therefore your beneficiary(s) would receive funds even when your estate is not able to pay all of its debts.

Life insurance can also be used for Charitable Giving and provide a tax deduction for the owner of the policy.

Written by Margaret Verschuur with information provided by Deana Longland, Personal Insurance Advisor, 250-202-0529,