Helping Your Family to Best Use Life Insurance Money After You’re Gone

Life insurance is a staple of financial planning conversations, and despite decreases in purchase rates, 59% of Americans own this important product, according to LIMRA’s annual survey. The reasons people purchase coverage are incredibly varied, and many people have multiple financial intents that influence their decision, but some of the most common are related to replacing income, leaving an inheritance and paying for key expenses, such as a mortgage. In nearly every situation, someone purchases a policy to ensure their loved ones can pay for the things they need and live a reasonable lifestyle after their death.

Therefore, if you have a life insurance policy or you’re considering getting one, you’ll likely want to also ensure your family has little trouble receiving your life insurance benefit and managing the money. Unfortunately, this isn’t always the case. But you can take steps while still alive to help make sure those you care about get the full benefits you intended when purchasing a policy.
 

Assign Beneficiaries Correctly

 
When you purchase a life insurance policy, you’ll be asked if you want to assign beneficiaries. If you don’t assign beneficiaries, you assign ineligible ones or you designate distributions incorrectly, then your benefits might not be disbursed the way you intended. The money may simply become part of your estate, and it would be subject to probate. Once money is in probate as part of your estate, it can be distributed to creditors or fought over by different family members, and the process can take months. During this time, your intended beneficiaries may struggle financially.
 
It’s fairly simple to correctly assign beneficiaries. First, determine who you would want to receive your life insurance proceeds, and provide the insurer with their information. If you live in a common property state and are married, you may need your spouse’s permission to assign anyone else as beneficiary. And if you want to assign someone who can’t care for themselves legally, such as a minor or a pet, then you would need to first set up a trust for their benefit.
 
Then you’ll need to assign each beneficiary an order of priority, such as whether they’re a primary or contingent beneficiary, and a percentage of the policy’s death benefit. It’s generally recommended that you don’t assign a particular dollar amount, as any changes in the payout, due to a fee or policy loan, may cause confusion.
 

Make Sure Your Family Knows How Debts Work and How to File a Claim

 
Since you purchased a life insurance policy with specific intentions in mind, it’s important that your beneficiaries not only know how to collect the proceeds but also how the money should be used.
 
A life insurance payout is generally distributed to beneficiaries tax-free and is not accessible to creditors. But if you have debts, your family should know which ones need to be paid. For example, if you have an outstanding federal student loan, this obligation doesn’t need to be addressed by your spouse or children after you’ve passed away, as the government forgives the debt. On the other hand, a mortgage would need to be paid by your family if they intend to continue living in the house. Your family will need to know how to best use the life insurance money to address the most critical debts. Otherwise, they might listen to creditors who want to be paid and use the money to pay off debts that would otherwise disappear.
 
In addition to being familiar with your financial obligations, your beneficiaries should know you have a life insurance policy and how to collect the money after you’ve died. Otherwise, you could have paid thousands of dollars in premiums simply to have the money not reach them, or it could take years for them to collect. By giving your beneficiaries a copy of your life insurance policy and your insurer’s claims contact information, you’ll help ensure they have all the necessary information to file a claim and reduce friction in the process.
 

Set up Children or Dependents With a Payment Plan if Needed

 
Many of the top life insurance companies offer the ability for life insurance proceeds to be delivered as either a lump sum or paid over a number of years, similar to a distribution plan. This can be a helpful option for parents who are concerned about how their children make financial decisions after receiving a large sum of money. That’s especially true if the payment needs to last for an extended period of time. Or, you might be in charge of your family spending and set up your spouse to receive the money needed each year, while the rest earns interest with the insurer.
 
You might prefer to discuss the options with your family members, which allows them flexibility to choose. But if you want to exercise additional control over distributions, whatever your reason, you shouldn’t be concerned about a limited set of options when it comes to life insurance. So long as you ask about distributions when you purchase coverage, you can find the company with the right set of options for yourself.
 
About the Author:
Robert Harrow reports on the credit card industry, focusing on how changes to regulations and card offerings will impact issuers and consumers alike. Prior to working at ValuePenguin, Robert researched cancer imaging and treatment laser systems at CUNY Hunter College. He graduated with a major in Physics and minor in Mathematics from Hunter.
 
 
This article is intended to provide general information and should not be considered legal, tax, or financial advice. It’s always a good idea to consult a legal, tax or financial advisor for specific information on how certain laws apply to you and about your individual financial situation.
Views expressed are the personal views of the author, and do not represent the views of the National Foundation for Credit Counseling, its employees, its members, or its clients.