20 September 2013 0 Comments

Managing Life Insurance Proceeds After You Are Gone

managing moneySome individuals are convinced that their spouse would have no ability to manage a large life insurance payout at their death, so they want to control how the benefits are paid to her.  Oops, I didn’t mean to be sexist, but the fact of the matter is that this concern is more often heard from a husband about his wife’s inability to manage funds than the reverse.  I’ve even heard this as an excuse some husbands give for not purchasing any life insurance.  That stands out as one of the dumbest Archie “Bunkerisms” of all time!

Well, if controlling how life insurance proceeds are paid out is important to you, the insurance policies do have a feature referred to as Settlement Options. These options state that instead of receiving a lump sum payment at the death of the insured, a payout will be made monthly at either a stipulated amount until all funds are gone, or for the lifetime of the beneficiary.  There will be a minimum interest credited and a guaranteed mortality table in the case of the lifetime payout.  If the insured owns the policy, during his lifetime he could stipulate one of these options be irrevocably applied for all or a portion of the proceeds. The problem with this is that once an option has been elected and payments started, there is no way to change your mind.  So, if funds for an emergency are needed, no access to remaining cash is allowed.  It is generally not a good idea to lock in these options, unless there are huge additional, liquid assets.  Eliminating all future flexibility of payments could create a tremendous, unintended hardship.

Life insurance policies also provide a Secured Account feature that places the proceeds in an interest paying account until a final determination of payout is elected.  This is probably a good idea, especially if the estate of the deceased or assets of the beneficiary are subject to claims of creditors.  There may be some creditor protection while proceeds are held by the insurance company.  Check with local council for details.  Also check on what interest rates are being credited by the insurance company.  They may be more competitive than other interest baring accounts from financial institutions of comparable strength.

If there is some legitimate reason for putting restraints on a beneficiary’s use of funds, then have an attorney draft a trust into which the proceeds would be paid giving a third- party trustee investment authority and defining conditions that allows for discretionary payments based on need.  Compassionate control after death.

Next … some strange conceptions of when insurance is needed.

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