What to Consider When It’s Time to Use Life Insurance
When it comes time for a primary beneficiary to use a life insurance policy, there are many important decisions to be made. It’s understandable to want to get financial assistance with unpaid bills, outstanding debts, and funeral and burial expenses. However, it’s important to consider your options before making any decisions with how to use your loved one’s life insurance resources.
Take Your Time
Rushing to make decisions, whether it’s because you feel you have limited time to do so or it’s at the urging of well-meaning family members, could result in actions you won’t be able to reverse later. Even with estate tax returns, you get about nine months to file, so there is still time for you to clearly understand your available options.
Aside from the policy itself, documentation you’ll need to collect should include bills, bank information, and papers related to other assets such as stocks and bonds. Start by determining what assets are in both of your names and identify any assets that may have only been in your loved one’s name. An accountant or estate planning attorney can help with this process.
Life insurance policies allow for the distribution of financial assets in many ways among multiple parties. Identify all listed beneficiaries and determine whether or not the policy was updated to add or exclude certain parties. In addition to the primary and contingent, or alternate, beneficiary, types of beneficiaries may include:
- Family members: Family members who depended on the policyholder as their main source of financial support are often listed as additional beneficiaries.
- Legal guardian: If a minor is named as the primary beneficiary, a legal guardian will serve as the beneficiary until that person is of legal age.
- The estate: An executor or administrator is named if the main beneficiary is the estate of the policyholder rather than any individual.
Continue Paying Bills
While you may be able to cancel some prior monthly obligations, bills should continue to be paid, especially anything that also has your name attached to it. For large debts, some creditors may make a claim on the estate of your loved one if you suddenly refuse to make anymore payments or honor certain debts.
Consider Payout Options
Death benefit payment options from a life insurance policy can include a single lump sum payment or life income in the form of regular payments for the rest of the beneficiary’s life. While it’s tempting to take the full payout, you may want to consider letting the money gather interest and receive payments monthly to help with recurring expenses. Additional payout options include:
- Life income with a period certain: Payouts are linked to a specific period of time, 5 years, 10 years, etc., and will stop at the end of that period or if the beneficiary dies before that period is up.
- Joint and last survivor life income: Payouts are made to more than one named beneficiary and will continue until the last beneficiary passes under this option.
- Specific income: The beneficiary can instruct the insurance company on how to make payouts, as in $10,000 a year for 10 years on a $100,000 benefit.
- Interest income: The beneficiary can opt to only receive interest payments and pass the remainder of the payout to a second beneficiary.
Additional Income and Benefit Sources
Life insurance may not be your only available source of income following the death of your loved one. Depending on your age, you may be entitled to receive Social Security benefits. The same is true for any children who may be old enough to receive such payments. If your loved one was still working at the time of their death, there may be unpaid wages you’re entitled to receive. You may also be able to receive pension benefits there were receiving or set to receive.
If you’re not sure which options are best for you, consult with the insurance company or agent who created the policy, if possible. Contact information for the agent should be on the policy itself. An estate planner or financial advisor can also provide useful insights. Ask plenty of questions and gather as much information as you can before making decisions. Ultimately, you want to be comfortable with what you decide is best for your situation.