Wills vs. life insurance policies: Who’s boss?

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Sometimes, wills and life insurance policies contradict each other. This generally happens when the policyholder forgets to update their life insurance policy’s beneficiary designation after a major life event. For example, your parent may have left you their estate in their will, but their ex-spouse is listed as their life insurance beneficiary.

In this situation, the life insurance policy trumps the will. The insurance company will only pay out to the listed beneficiaries, regardless of what a will says.

“Life insurers have an obligation to pay the beneficiaries named in the policy,” says spokesperson Whit Cornman of the American Council of Life Insurers. “But if none of the named beneficiaries are alive when the policyholder dies, then the proceeds are typically paid to the policyholder’s estate.”

Without a living life insurance beneficiary, the will will trump the life insurance policy.

Should you get life insurance or a will?

Ideally, you get both. While life insurance will replace your income and pay out a lump sum to your beneficiaries after you die, it doesn’t manage your estate or any other financial assets. In order to determine how your estate is distributed, you’ll need to get a will.

A will can also help your family in determining how you want the life insurance proceeds to be used. In your will, you can leave your written wishes so your family is aware of any payments they need to make.

“A will [only] describes the goals for distribution and sometimes the control of financial and non-financial assets after a person’s death,” says Donald Light, Director of Property Casualty Practice at consulting firm Celent.

Pros to life insurance

Here are some advantages to having a life insurance policy:

The money is disbursed almost immediately to your beneficiaries after they provide a death certificate and proof of identity. This is especially helpful if they have to pay for the funeral or if the estate has unpaid bills.
Probate fees can diminish an estate, which life insurance can be used to cover.
A life insurance policy is a contract — like the deed to a house — and legally is more binding than a will, particularly one that hasn’t yet been probated.

Can you dispute a will or life insurance policy?

Both wills and life insurance can be challenged, says Gregory Weinig, practicing partner of estate litigation for Connolly Gallagher LLP. The key to challenging either a policy or a will is proving that the person didn’t know what they were doing or were acting under duress.

“Cases where the [life insurance] beneficiary is challenged usually involve incapacity such as weakened intellect, undue influence — like someone exercising dominance — or suspicious circumstances,” says Weinig.

How the will and life insurance policy are dispersed

There is usually an executor named for the will, who is the person that ensures the will is carried out. But if there isn’t– and the deceased’s assets were substantial – chances are that a judge would select one.

The executor’s job is to examine the estate’s paperwork, in which case they might find a previously unmentioned life insurance policy. If such a policy is found, the executor could have the additional job of tracking down the beneficiary. And in the interim, they also have an obligation to make payments on the policy – out of the proceeds of the will – until the beneficiary is located.

The life insurance beneficiaries would then file a death benefit claim to receive the life insurance payout.

Lawyers suggest leaving an in-depth memorandum with the attorney who drew up your will detailing life insurance policies, properties, accounts and anything owned, along with who inherits it, their addresses and Social Security numbers if possible.

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