Optimizing Your Life Insurance Death Benefit

When looking at life insurance, your clients need to make sure they buy enough coverage to provide for loved ones when they pass. However, life insurance beneficiaries also need to understand how these payouts work. In this article, we're going to go over the ins and outs of life insurance payouts, as well as how cash value life insurance can be used when your clients are still alive. 

Understanding Payout Options

Almost all insurance companies have three options for beneficiaries to receive funds. 

• Lump-Sum - In many cases, the beneficiary will opt for a single payment. The primary benefit of this is to avoid tax penalties since life insurance payouts are income tax free. . 
• Installments - The main problem with a lump-sum payment is that the recipient may be tempted to spend it all as quickly as possible. Installment plans can stretch the funds out over years or decades, providing a reliable source of income for each beneficiary.
• Annuities - With an annuity plan, the death benefit will accrue interest until the balance is depleted. While beneficiaries can receive a much larger death benefit over the long term, if the amount was sizable (i.e., $1 million), the tax burden on interest payments can be significant. . 

Immediate Needs

Your client's beneficiaries should receive a payment within 30 days, depending on a variety of factors. Be sure that your clients give all of the pertinent account information to their beneficiaries. The sooner the process gets started, the faster they can get paid. Once the policyholder dies, various expenses have to be taken care of as soon as possible, including:

Paying Funeral Costs

The average funeral in the U.S. can be between $7,000 and $10,000. Also, if your client wants to be embalmed or displayed during the ceremony, time is of the essence. If beneficiaries don't have cash on hand and are waiting for payment, that could create a disaster. 

Medical Expenses

In some cases, your clients may die after a prolonged visit to the hospital or long-term care center. Unfortunately, because healthcare costs are so high, most of those debts will have to be covered by a life insurance payout. 

Long-Term Uses

Financial stability is much more than providing money for end-of-life expenses. Many of your clients will want to pass on a substantial nest egg that can be used for a wide variety of purposes. Some of the most common long-term goals for a term life insurance payout can include: 

Investments

While it's tempting to put the funds into an annuity that will accrue interest, it's better to put it into different investment accounts. IRAs, stocks and bonds, and CDs are all excellent options. Your clients should discuss investment strategies with their beneficiaries as soon as possible. Also, cash value life insurance can be used as an investment tool for your clients while they're alive. 

Creating an Emergency Fund

It's impossible to predict what the future holds. Your client's beneficiaries could be faced with massive bills and unexpected expenses. Part or all of the life insurance payout can go toward an emergency fund to provide financial peace of mind. 

Higher Education Tuitions

Many individuals get a term life insurance policy to protect spouses and young children. If your client dies before the kids reach college age, the death benefit can be used for higher education. Also, let your clients know about using a 529 Plan for the money, which can grow tax-free until the child goes to school. 

Mortgages

In many cases, your clients will be leaving behind property as well as a life insurance payout. However, spouses and children will have to finish paying the mortgage and property taxes. Fortunately, a sizable death benefit can cover these costs. 

Consult the Life Insurance Experts

Buying a life insurance policy is more than just a monthly payment and a death benefit. We can help you understand the needs of your clients so that they can make the right choices for themselves and their families. Contact Advisor's Resource today to find out more.