Beneficiaries For Life Insurance: What To Do Next

Written by Jason Fisher

While you’re facing an excruciating time as you’ve lost a family member, you now have a lot of decisions to make: funeral arrangements, settling estate concerns, and immediate family needs.

You may also now be dealing with life insurance proceeds if the deceased had a life insurance policy at the time they passed. You may suddenly be wondering what to do with it, or have questions about how life insurance works after a claim.

Life Insurance Proceeds

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Beneficiaries For Life Insurance: Is There Tax?

You might be asking yourself, “Do I have to pay taxes on life insurance payouts?

The taxation of life insurance proceeds is a very often asked question to someone who is unfamiliar with life insurance already. Obviously, there may be concerns of a large tax burden if you are suddenly handed a large lump sum of cash.

While this is a loaded question to some extent, the basic answer is life insurance proceeds are generally tax free to the beneficiary. Life insurance is not treated like other lump sum gains because of a few different reasons:

  • Pre- vs. Post-Tax Payment
  • Interest or Gains
  • Immediate Estate

First, the premiums which an insured pays the insurance company as long as they own their life insurance policy are paid with after-tax dollars. Because the taxes are paid up front, the payout is able to be treated differently, similar to a Roth IRA. If life insurance premiums were paid using pre-tax dollars, the treatment might resemble something to the tune of a Traditional IRA or 401(k) plan.

Second, there is not taxation for interest or gains within a life insurance policy. If you are the recipient to a term life insurance policy, there was no cash build up inside the policy anyway; there was only a premium paid for a specified death benefit. If the claim comes from a whole life policy, the cash build-up inside doesn’t matter as much as the death benefit amount. The cash is not transferred upon death, but the leveraged death benefit amount becomes the proceeds of the life insurance policy.

Last, life insurance proceeds are actually an immediate creation of an estate. Whereas the life insurance lump sum is not taxable, it could actually create an estate large enough to create estate taxes. The actual proceeds themselves may not be taxable, but the result of the value of the newly created estate might, so it’s not necessarily tax free if you want to look it at in this manner.


Investing Life Insurance Proceeds

You may not be thinking about investing while you’re taking care of a lost loved one, but do consider the fact life insurance is purchased to replace both short and long term financial obligations.

While it’s not necessarily investing in the traditional sense, like going and buying up stocks or real estate, it does entail making financial decisions which can have a long term impact. Part of the proceeds might have been ear marked for very immediate needs, such as funeral costs, paying off lingering debts, or other short term obligations.

But in most cases, life insurance is predominantly aimed at replacing income to a spouse or child over period of time, or paying off large, long term obligations, like mortgages.

This is where the proceeds become much more of an investment type of function, because you want to make sure the dollars go as far as they were intended, if not farther. If the money was supposed to replace an income for, say, 10 years, the last thing you want is for the money to run out in 8 or 9 years, leaving you short of covering your needs.

You’ll want to consult someone who can advise you on turning the proceeds into a stream of income which can perhaps increase over time with minimal risk, fight inflation, or even create income for as long as you live. This is what actually creates the peace of mind from life insurance, and this is its main purpose: protecting you when your lost loved one no longer can.

While each person is different, you may find yourself emotionally attached to the proceeds, and this is not uncommon. The life insurance benefit may seem like a last memory or otherwise sentimental value. But remember, it was purchased for a reason, and the comfort of the money being used appropriately will honor the former insured.

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Either way, do not take drastic action. Take your time. Take care of the most immediate necessities first, such as funeral expenses, and keep in communication with a trusted advisor or set of advisors in the meantime. You want to be sure you don’t make decisions too quickly, which are probably emotionally driven ones. Life insurance is one of the most important decisions that you can make. Take the time to make the best and wisest decision that you can.

Your Own Insurance: Is There A Plan?

Throughout the process of a claim, grieving, and returning to your daily life, you may have discovered a lot about what life insurance can do, and it’s true purpose. Was there enough insurance in place? Were there not enough instructions or plans in place with what to do with the proceeds?

You may want to take some time to evaluate your own situation, so your plan is clear to your beneficiaries. Revisit your own insurance plan, or if you don’t have any, think about buying life insurance.

One of the most important things you can do for your family is to ensure that you have enough life insurance coverage to give them the protection that they deserve. Make sure that you calculate your life insurance needs by adding up all of your debt and determining how much money your family would need if you passed away. Your beneficiaries will be left with all of your debts and unpaid expenses, that’s why life insurance is so important. It gives them the resources they need to pay all off all of those debts without putting a strain on their budget. So whether it’s a small policy or a 1 million dollar life insurance policy you’re in need of; we can certainly help you find the coverage you deserve.

If you have any questions about life insurance or getting the best rates, please contact us today. We can answer those questions and get you’re the best policy to fit your needs. Don’t’ wait any longer to get the best coverage for you and your family. You never know what’s going to happen tomorrow, you can’t predict the future, which means you should start the life insurance process today.


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