Congratulations if you bought Houston life insurance. However, your job isn’t done yet. There are important steps to take after a policy is purchased.
The first step is putting your agent’s business card on the refrigerator so you always know where it is and it has no chance of getting lost. If you ever need to update your payment information or make another policy change, you’ll have a tough time doing it if your agent’s business card is shoved deep in a drawer and the policy is buried in a stack of papers.
The second step involves letting your beneficiaries know about their new status as beneficiaries. Keeping them in the loop will avoid confusion later. I don’t recommend having this conversation with contingent beneficiaries though. A contingent beneficiary is only entitled to the death benefit if the insured outlives all the primary beneficiaries. Contingent beneficiaries play an important role in making sure a living beneficiary is available for benefit payments. However, they may resent being told they are second in line.
The third step is deciding where to store your Houston life insurance policy. Many people give the policy contract to their beneficiary since the beneficiary will need immediate access to it when it comes time to filing a claim. If you want to keep the policy in your home and with the beneficiary, the insurance company will charge a small fee, usually around $25, for a duplicate copy. I also recommend placing it in a fire safe.
When I talk about disbursement options, I am talking about the different ways life insurance companies can pay out your benefit payment(s). I will discuss the following disbursement methods: lump sum, payment for a guaranteed period, payments for life, payments of a specified amount, and interest only payments. There are minimum requirements for any option other than lump sum payments, so check with your insurance company or policy contract for those requirements. Also, if you are going with any option other than lump sum payments, talk to your tax advisor about the consequences of accumulating interest.
- Lump sum is the least technical method. It also happens to be the default method if an option isn’t selected. Lump sum is going to be the desired method for the majority of people. If you fall within that group, then sit back and do nothing–you’re set. Besides the obvious advantage of getting all your money at once, there is also the tax advantage of no interest (or very little interest if the claim is contested).
- Payments for life provide equal monthly payments for a guaranteed period, and then for life. It basically annuitizes the life insurance benefit for a period certain.
- Payments of a specified amount breaks up the total benefit into monthly, quarterly, semiannual, or annual equal payments. A minimum amount of interest is applied.
- Payments for a guaranteed period provide equal monthly payments for the number of years elected.
- Interest only payments are self explanatory. The interest only payments are for a set number of years and they cannot go beyond the lifetime of a beneficiary. A minimum amount of interest is applied.
You might be wondering why anyone would select a life insurance disbursement option other than lump sum. Perhaps a beneficiary is inclined to overspend if too much money is given out at once. Another advantage is the interest rate, which is better than anything at a bank. Don’t hesitate to contact us with any questions.
Having a backup beneficiary, also called a contingent beneficiary, is a good idea. Many policy owners forget to update their policy when a beneficiary passes away. If there are no living beneficiaries, the insurance proceeds are left to the estate. Many of the financial advantages of life insurance evaporate whenever the estate is the beneficiary of a policy. Bottom line: always list a contingent beneficiary.
You can also split the insurance proceeds among several primary beneficiaries. This isn’t common on small policies, but it may serve a purpose on larger policies. Simply list out all the primary beneficiaries and what percentage they receive. Go to our contact us page if you have questions.
Find out how to choose the right beneficiary for your life insurance policy.
How do you choose a beneficiary for life insurance? If the policy owner and the insured are the same person, you can usually name anyone as beneficiary. If the policy owner and insured are not the same person, then insurable interest must be shown. Insurable interest is a fancy way of saying that a person will have a love loss or financial loss if you pass away. Some policies restrict insurable interest to a potential love loss.
Beneficiaries can use life insurance proceeds for any purpose so its important to pick a beneficiary that will likely use the money for its intended purpose. Naming a spouse as beneficiary is good, but keep in mind that many policy owners forget to change beneficiaries if there is a divorce. Policy owners can change beneficiaries as often as they want unless there is an irrevocable assignment. Naming minor children may seem like a good idea, but its not recommended. Life insurance companies cannot give life insurance proceeds directly to minor children. Instead, a court has to appoint someone to administer the money for the minor child. The administrator charges a fee, and the bank may also charge a fee if the money is put into a trust. You’re welcome to contact us with any questions.