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The Role of Life Insurance in Estate Planning

Life Insurance is a valuable estate planning tool that enables you to plan ahead for the future. Read on to find out why you should consider implementing it.
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If you’ve struggled to spare a moment to ponder what will happen to your family if you pass away, know that you are not alone. While we all want what’s best for our families, we understand that it can be difficult to consider the type of life your loved ones will lead following your death; how will they afford to pay the bills? Will they be able to manage their debts? What will happen to their livelihood when you’re no longer there to provide for them? This is where Life Insurance steps in.

When implemented properly, Life Insurance is a valuable estate planning tool that can be used to provide financial security for your loved ones when you’re not around to do so. Life Insurance enables you to adequately plan for your family’s future, so you can spend more time creating new memories and focusing on the present. 

Why You Should Consider Taking Out Life Insurance as Part of Your Estate Plan 

Many individuals take out a Life Insurance policy as part of their Estate Plan because it’s a way to ensure their family members and loved ones continue to receive financial support in the event of the unthinkable and unexpected. 

When you choose to take out Life Insurance, the beneficiaries you have outlined within your policy will receive a specified amount depending on the level of coverage you have. Your beneficiaries can then choose to utilise the proceeds from your policy to pay for any of your medical or funeral expenses, meet mortgage repayments, settle income taxes, protect any interests you may have in a business partnership, and maintain their lifestyle(s). 

Benefits of Life Insurance in Estate Planning 

There are many benefits of including a Life Insurance policy in your estate plan. Apart from offering peace of mind to you and financial support to your beneficiaries, Life Insurance: 

  • Can be utilised to pay any estate taxes and inherently avoid the forced sale of an asset 
  • Is free of income tax (when proceeds are paid to a named beneficiary) 
  • Allows you to transfer any proceeds from the policy to a trust created in the will of the policyholder for the benefit of their dependents 
  • Can fund a buy-out if the policyholder owns interest in a business 

Finding the Right Life Insurance Coverage For You 

A number of studies have found that as many as 1 in 3 Australians were found to have an inadequate level of life insurance coverage. Purchasing the wrong type of policy could mean that you and your family are not covered for certain claims and could be left in financial hardship. There are four different types of Life Insurance products you should consider before determining which is most appropriate for you and your individual needs: 

Life Insurance 

In a Life Insurance policy, your beneficiaries are provided with a specified amount of funds to ensure that they remain looked after following your death. 

Income Protection Insurance 

If you’re left unable to work as a result of illness or injury, an Income Protection Insurance policy will pay up to 75% of your gross annual income in monthly instalments to cover your day-to-day expenses until you’re in a position to return to work. 

Total and Permanent Disability Insurance 

In the event that you are left permanently disabled as the result of an illness or injury, a Total and Permanent Disability Insurance policy will provide you with a lump sum payment that you can put towards the cost of any associated medical expenses, bills, and supporting your family. 

Critical Illness Insurance (also known as Trauma Insurance) 

If you’re diagnosed with an injury or illness such as cancer, stroke, blindness and deafness, a Critical Illness Insurance policy will give you a lump sum payment that can be used to pay for medical expenses, fund your lifestyle and provide for your family. 

Self Ownership of Life Insurance in an Estate Plan 

When an individual is the policy owner as well as the life insured, the death benefits that are paid to the person’s estate are distributed to any nominated beneficiaries outlined in their will. When considering assets, many people often forget to factor in any Life Insurance policies they hold. 

It is also important for individuals who are the policy owner as well as the life insured to note that once Life Insurance proceeds are paid out, there may be an amount of money that needs to be managed for the beneficiaries. This is why it’s important to review Testamentary Trust provisions regularly to ensure that the right people are in control of the benefits in a protected and tax effective structure. 

Life Insurance Owned Through Superannuation 

When an individual is the life insured but the policy owner is a superannuation fund, the Life Insurance proceeds will be paid into the individual’s superannuation fund first, and then to their estate. Because superannuation is subject to specific rules surrounding member benefits, pay-outs and beneficiaries, when Life Insurance is owned through superannuation, it is crucial that the policyholder has: 

  • Outlined who their nominated beneficiaries are 
  • Appropriately planned for both the distribution and control of their member account balance in their superannuation fund 
  • Decided whether or not they will have a Superannuation Proceeds Trust drafted into their will 

Do You Really Need Life Insurance if You’re Fit and Healthy? 

We’ve all been guilty of saying “It’ll never happen to me” when thinking about accidentally smashing our phone screens, hitting another person’s car, or damaging your property. However, the reality is that accidents can and do happen. The ‘head-in-the-sand’ mentality, unfortunately, won’t prevent you from accidentally dropping your phone down a flight of stairs, opening your car door into the brand new Merc beside you, or smashing your kitchen window playing cricket with the kids in the backyard. 

So, with the knowledge that accidents can happen at any time (often without warning), why would you want to gamble with something as precious as your life? 

A recent study conducted by OnePath Life Research found that: 

  • Over 1,600 people aged between the ages of 26 and 59 die on our roads each and every single year 
  • ⅓ of Australian women and ¼ of Australian men will suffer cancer at some stage in their life. Only 50% of those will live for a further 5 years following their diagnosis 
  • Over 50,000 people are hospitalised each year due to road accidents 

While it’s not an easy truth to accept, the reality is that accidents are an unavoidable part of life – no matter how careful you may consider yourself to be. Here at BlueRock, we understand the sensitivity involved in discussing Life Insurance and estate planning. If you’re interested in learning more or getting started on your estate planning and Life Insurance journey, get in touch with our multidisciplinary Melbourne-based life insurance advisors and estate planning lawyers


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