**Life insurance** (noun) — A contract between a policy holder and an insurance company whereby the insurer agrees to pay a designated beneficiary a sum of money (the death benefit) upon the death of the insured person, in exchange for premium payments made during the insured's lifetime. Life insurance policies can serve estate planning purposes by providing liquidity, replacing income, paying debts, or equalizing inheritances among beneficiaries.
Life insurance is a policy that pays money to the people you've named as beneficiaries when you die.
You pay premiums (regular payments) to the insurance company while you're alive. In exchange, they promise that when you die, they'll pay a lump sum—the death benefit—to whoever you've designated as your beneficiaries. You don't get anything while you're alive (unless you cash in the policy or borrow against it), but your beneficiaries receive money when you're gone.
There are two main types: term life insurance and permanent life insurance. Term insurance covers you for a specific period (like 10 or 20 years) and pays out only if you die during that term. Permanent insurance (including whole life and universal life) covers you for your entire life and builds cash value over time, but costs significantly more.
Life insurance doesn't go through your estate—it pays directly to your named beneficiaries, bypassing probate. This makes it quick and simple for your beneficiaries to receive the money.
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Life insurance plays an important role in many estate plans, serving several purposes depending on your situation.
The most common use is income replacement. If your family depends on your income, life insurance ensures they'll have money to live on if you die. A working parent with young children, for example, might have life insurance equal to several years' salary to support the family until the children are grown.
Life insurance can also provide immediate cash to cover funeral expenses, pay off debts, or handle estate administration costs. When someone dies, there are bills to pay before the estate can be distributed—and life insurance proceeds are often available quickly, giving your family breathing room.
For larger estates, life insurance can be used to pay estate taxes or inheritance taxes without forcing the sale of assets like a family business or property. The insurance provides cash precisely when it's needed, preserving other assets for beneficiaries.
Life insurance can also equalize inheritances. Imagine you have two children: one runs your family business, and you want them to inherit it. Life insurance can provide an equivalent value inheritance for your other child, ensuring fairness without having to sell or split the business.
The key estate planning consideration is who you name as beneficiary. You can name individuals (your spouse, children, or anyone else). You can name your estate as beneficiary, though this means the proceeds go through probate and may be subject to creditor claims. Or you can name a trust as beneficiary, which gives you control over how the money is managed and distributed.
Keep your beneficiary designations up to date. Life insurance proceeds go to the named beneficiaries regardless of what your will says. If you named your ex-spouse as beneficiary years ago and never changed it, they might receive the money even if you've since remarried and have a new family.
Life insurance proceeds are generally tax-free for beneficiaries in Australia. In other jurisdictions, the treatment varies—in the US, beneficiaries don't pay income tax on death benefits, though the policy value might be included in calculating estate tax.
If you have life insurance, make sure your executor knows about it. Policies don't pay out automatically—someone needs to make a claim with the insurance company. Your executor should have a list of your policies and contact information for the insurers.
**Related terms:** [Beneficiary](/dictionary/beneficiary), [Death benefit](/dictionary/death-benefit), [Life insurance trust](/dictionary/life-insurance-trust), [Estate planning](/dictionary/estate-planning)
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