Advice on managing life insurance pay-outs

If you’ve taken out life insurance, you’ve taken a major step to ensuring your family’s financial security after your death. Here’s some advice for the next important step - talking to your beneficiaries about how to spend your life insurance policy pay-out.

A life insurance claim is paid quickly, to ease the financial burden of a breadwinner’s death. But that also means that while your beneficiaries are in mourning, they’re faced with some big financial decisions, including what to do with the pay-out of your life insurance policy.

No one likes to talk about death, but if you want your beneficiaries to make good financial decisions during this difficult time, you need to set aside time to talk to them about your life insurance policy. Share with them what your objectives were when you took the policy out and how you intended the pay-out to be spent. This discussion will guide them when they receive the pay-out from your life insurance policy.

Here are some of the issues to consider.

Have a plan for the weeks following death
This is a time for mourning, not for making big financial decisions. Set up a clear plan for what the beneficiaries should do with the pay-out at this time. Your plan should deal with:

• Funeral costs – tell your family what kind of funeral or service you would like. Instead of borrowing money or using savings to pay for a funeral, it is best to have a funeral policy to meet these costs. Alternatively, find out whether your life insurance policy has a funeral benefit that pays out immediately for funeral expenses.
• Immediate living expenses – things like a bond, school fees, car payments and groceries need to be paid. The income of a surviving spouse can be used to pay these. Alternatively, set aside just enough from a life insurance pay-out to cover a few months’ expenses. This way your beneficiaries won’t experience too much financial disruption while they are coming to terms with your death.
• Other expenditure - beneficiaries should avoid the temptation to ‘spend just a bit’ – small amounts become large amounts very quickly. A good piece of advice is to put the funds in an interest-bearing account like a money market account until the beneficiaries are ready to make longer term decisions about how to spend or invest it.

Spending the pay-out
Having a bank balance with more zeros than you’re used to can make people inclined to treat themselves, or to acts of generosity. But this isn’t the same as winning a lottery. Ideally, you and your beneficiaries should have a clear idea of what the proceeds should be spent on (with some flexibility, of course). Take into account some or all of the following:

• Home expenses – bond, rates and taxes, water, electricity and maintenance costs
• Education - fees, extra murals, books and equipment
• Daily living expenses – groceries and clothing, transport, entertainment and connection fees for cell phones and internet
• Paying off debts
• Emergency funds
• Insurance - life, dread disease and disability insurance, and income protection for the surviving spouse, house and car insurance, and medical aid for the family
• Family obligations – for example supporting a relative

Investment advice
When you receive a lump sum amount – no matter what the circumstances – you will get a lot of advice from friends and family. Some of this advice may be very good, but the objective advice of an independent financial advisor is often better, especially in times of change and emotional upheaval. Discuss with your beneficiaries who they should ask for advice about financial and investment decisions, and how the lump sum pay-out can be used to meet your objectives.

There are three options when your beneficiaries receive a lump sum pay-out. Depending on how much debt you had and their current and future living expenses, they can:

• Use the whole amount to pay off debts
• Invest the lump sum to receive a monthly income
• Pay off some debt and invest the rest to generate a monthly income or to cover future expenses

If they choose to invest, and are considering where, they need to ask these questions:

• How long is the investment period?
• How quickly can they access funds?
• What are the risks?
• Are there any guarantees?
• What are the costs?
• What monthly income can they earn?

Note: Life insurance pay-outs are tax free, however if they are invested, any interest or dividends earned, and capital gains, may be taxed.

The bottom line
Talking about death isn’t comfortable. Many of us avoid this conversation at all costs. One way to change this is to think about the time you’ve taken over your insurance policy and the premiums you’ve paid so that your beneficiaries won’t suffer too many hardships without you. Don’t let all your hard work go to waste – talk to your beneficiaries so that they have a good idea on how to spend your life insurance policy pay-out