Determining how your life insurance proceeds will be allocated to your beneficiaries can be divided into two main categories: (1) lump-sum needs at death and (2) ongoing income needs. The option you choose depends on your individual situation and each option can be specifically tailored to fit your needs.
When an insured dies, certain expenses may arise that the loved ones or beneficiaries will need to pay immediately. These can include the funeral cost, burial and cremation; cost of probate court to prove the validity of the will and attorneys’ fees; repayment of any outstanding debts; and estate taxes.
In addition, the insured will need to consider how the operational costs to cover the ongoing expenses of their household will be determined.
The surviving family may need funds to pay for the mortgage or rent, utility bills, property insurance premiums, property taxes, food, clothing, transportation costs, and the cost of child care and/or education. These can be treated as either a pre-funded lump sum amount, or as an ongoing income need, depending on the status of the family when the insured died.
With the lump-sum at death option, the surviving family will be able to pay off any outstanding or immediate expenses so they can spend more time grieving the loss of their loved one rather than worrying about money. If there is money left over, the surviving spouse or beneficiary can use the remaining funds how they please.
Even if the surviving family does not have a long list of immediate expenses, the lump-sum option can be used to set up specific accounts to fund future situations. For example, prefunding of children’s educational needs can be classified under this option and it often recommend by financial planners. By doing so, the surviving spouse will not have to deal with budgeting for these needs in the future while still receiving the entire proceeds upfront.
With the ongoing income needs option, the insured takes into account that his/her family will have certain ongoing financial needs after their death. Again, the degree of these financial needs will vary from household to household. In some families, that can be a relatively short time period and in others it may take decades.
In some incidents the surviving spouse may never become self-sufficient with little intent to do so, meaning the need of financial security will be greater than if the surviving spouse were to become self-sufficient shortly after.
To understand your best option, talk to a qualified life insurance agent who can assist you with determining the best route for you and your family.
Want to learn more about life insurance? Read our article The Most Frequently Asked Life Insurance Questions.