There are many people who buy life insurance in order to secure financial future of their family in the event of death. If a husband is the primary or the only source of income in the family, he may want to buy life insurance to cover his family’s expenses after his death.
Usually, it is recommended to buy life insurance with a payout ten times your current salary. (There are life insurance calculators that will allow you to take various factors into consideration before deciding on the amount of insurance needed.[1])
Thus, if the husband decides to buy life insurance coverage in the amount of $1 million, his beneficiary (his wife or his children in this case) will receive $1 million tax-free upon his death.
The husband will become the policyowner and will make all major decisions about the policy. His main concern may be: Will the $1 million life insurance payment guarantee secure future for my wife and children after my death?
He may be concerned about whether his children will be wise enough to spend a large lump sum of money responsibly. He may have questions about his wife’s ability to pay off the family debt and future loans with this money. He may think about a possibility of large unexpected expenses or bad investment decisions.
The good news is the policyowner can protect his family from all these possible negative consequences. First, instead of instructing the life insurance company to send a lump sum payment to the beneficiary, he may ask for alternatives.
There are many other options of receiving the proceeds of a life insurance policy. Instead of getting all the benefits at the same time, the beneficiary may get payment installments spread out over several years.
For example, in our earlier example, the husband may ask the insurance company to pay to his wife and children $100,000 for ten years instead of paying $1 million upon death.
Second, the policyowner may name a trust, not an individual, as a beneficiary. This trust may be included in the will and upon the insured’s death, the benefits will be paid to the trust. The purpose of the trust is to ensure the widow and children receive a regular income that is sufficient to live on.
Naming a trust as a beneficiary is also beneficial when the policyowner wants to protect the life insurance proceeds from those who may have a claim on the money that rightfully belongs to his wife or children.
The terms of the trust may be designed in such a way so as to protect the life insurance money from those who may be in his family’s lives after his death and whose motives may not be sincere.
If you are in the process of purchasing life insurance coverage or you have concerns about an existing policy and not sure what options are available, please call your insurance company and ask how the proceeds of your life insurance policy may be paid out. If you decide to set up a trust, consult with an attorney who will help you with the whole process.
