Many people have life insurance, and they have it for a multitude of reasons. These include funeral costs, liquidity in an estate, help paying off taxes and so on. Whatever your reason for having it, I wanted to talk about how to make a claim on it, and separately, what to do with it once you have. You can see more at Kiplinger’s recent article entitled “What Is the Best Way for a Widow to Use Life Insurance Proceeds?”
When making a claim, you’ll need a couple of things. First and foremost, perhaps blindly obvious, is that your beneficiaries need to know you have it. If an insurance company becomes aware of a death they might reach out to named beneficiaries, but that is a big assumption. So, your life insurance beneficiaries or whoever may claim the insurance needs to know it exists.
Holding that aside, the person entitled to the money will start by contacting the insurance company. The company will send or direct that person on where to download a form to claim the insurance. Beneficiaries typically need to provide proof of who they are, a death certificate for the insured (which in most places is issued within a few weeks of death) and other information about how to pay the insurance. For example, some companies ask if you want to turn it into an investment fund at their financial institution, others arrange how to cut the check and so on.
It is worth noting that your executor or trustee won’t have the right to do this unless the estate or the trust is the beneficiary of the life insurance. All told, the process typically takes something like 30 days.
Now, what to do with the insurance proceeds varies based upon the purpose and need of the life insurance. I’m also going to assume for now that the insurance isn’t being paid to a trust which is designed to hold assets long term such as a descendant’s trusts. That might have different concerns.
So, with that said, here are some ideas on how to use the life insurance.
Funeral Costs. Use life insurance money to cover these costs to decrease your financial strain. Most funeral companies actually have you purchase a small insurance policy in order to prepay a funeral.
Ongoing Expenses. This is especially true when one spouse dies, but living expenses do not stop. Your income is frequently reduced. In fact, after the death of a spouse, household income generally declines by about 40% due to changes in Social Security benefits, spouse’s retirement income and earnings. The death benefit from a life insurance policy can help provide the funds you need to help cover your mortgage, car payment, utilities, food, clothing and health care premiums.
Debts. You are generally not personally responsible for paying off the debts of the decedent. However, when an estate does not have enough funds to pay all the debts, any gifts that were supposed to be paid out to beneficiaries will most likely be reduced. Note that you may be responsible for certain types of debt, such as debt that is jointly owned or a loan that you have co-signed. Talk to an experienced estate attorney to understand the laws of your state, so that you know where you stand concerning all debts. By way of example, you have very few responsibilities to pay a decedent’s debts in Texas.
Taxes. As a tie-in to debts, some people use life insurance to give an influx of liquidity to pay estate taxes. This often helps when an estate is large due to real estate or businesses or other illiquid assets. The IRS of course wants the tax paid in cash, so life insurance gives you the cash to do so without liquidating other assets.
Create an Emergency Fund. Life insurance can help build a liquid emergency fund, which should cover three to six months of expenses.
Supplement Your Retirement. When one spouse passes, the survivor becomes much more economically vulnerable. To retire, a person typically needs 80% of their preretirement income to live comfortably. So, insurance provides and extra supplement to cover that need.
Reference: Kiplinger (Dec. 17, 2021) “What Is the Best Way for a Widow to Use Life Insurance Proceeds?”